Workbook

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Macroeconomics
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WORKBOOK
The Icfai University Press

# 52, Nagarjuna Hills, Hyderabad 500 082
2004 The Icfai University Press.

All rights reserved.
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from The Icfai University
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Press.
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ISBN : 81-314-0227-4
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Ref. No. MACWB 04200404
For any clarification regarding this book, the students

may please write to us giving the above reference
number of this book specifying chapter and page
number.
While every possible care has been taken in typesetting
and
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editions.
Preface
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The ICFAI University has been upgrading the study material so that it is amenable for self study
by the Distance Learning Students.
We are delighted to publish a Workbook for the benefit of the students preparing for the
examinations. The workbook is divided into three different parts.
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Brief Summaries of Chapters
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A brief summary of all the chapters in the textbook are given here for easy recollection of the
topics studied.
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Part I: Questions on Basic Concepts and Answers (with Explanatory Notes)
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Students are advised to go through the relevant textbook carefully and understand the subject
thoroughly before attempting Part I. Under no circumstances the students should attempt Part I without
fully grasping the subject material provided in the textbook.
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Part II: Problems and Solutions
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The students should attempt Part II only after carefully going through all the solved examples in
the textbook. A few repetitive problems are provided for the students to have sufficient practice.
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Part III: Model Question Papers (with Suggested Answers)
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The Model Question Papers are included in Part III of this workbook. The students should attempt
all model question papers under simulated examination environment. They should self score their
answers by comparing them with the model answers.
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Effective from April, 2003, the examinations for all the subjects of DBF/CFA (Level-I) consist
of only multiple-choice questions. Each paper consists of Part I and Part II. Part I is intended to
test the conceptual understanding of the students. It contains 40 questions carrying one point
each. Part II contains problems with an aggregate weightage of 60 points.
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Please remember that the ICFAI University examinations follow high standards that demand
rigorous preparation. Students have to prepare well to meet these standards. There are no shortcuts to success. We hope that the students will find this workbook useful in preparing for the
ICFAI University examinations.
Work Hard. Work Smart. Work Regularly. You have every chance to succeed. All the best.
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Contents
Questions on Basic Concepts and Answers (with Explanatory Notes)
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Part I
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Problems and Solutions
Part III :
Model Question Papers (with Suggested Answers)
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Part II :
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Detailed Curriculum
Overview of Macroeconomics: Microeconomics vs. Macroeconomics, Fundamental Concerns of Macroeconomic
Policy, Objectives and Instruments of Macroeconomics, Aggregate Supply and Aggregate Demand.
The National Income and Product Accounts: Gross Domestic Product, Two Measures of National Product:
Goods-Flow and Earnings-Flow, Business Accounts and GDP, The Problem of "Double Counting", Details of
the National Accounts.
Consumption and Investment: Consumption and Saving, The Consumption Function, The Savings Function,
Investment: Determinants of Investment, The Investment Demand Curve, Shifts in the Investment Demand Curve.
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Aggregate Demand and the Multiplier: The Downward-Sloping Aggregate Demand Curve, Shifts in
Aggregate Demand, Relative Importance of Factors Influencing Demand. Output Determination with Saving and
Investment, The Meaning of Equilibrium, Output Determination by Consumption and Investment, The
Multiplier, The Multiplier in the AS-AD Framework, The Paradox of Thrift.
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Government, International Trade, and Output: Impact of Fiscal Policy on Output, Fiscal Policy Multipliers,
Impact of International Trade on GDP.
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Money and Banking: Money Supply and Interest Rates: Components of Money Supply, Interest Rates: Real vs.
Nominal Interest Rates, The Demand for Money, Money's Functions, The Process of Deposit Creation, Balance
Sheet of the Central Bank. Credit Control by the Central Bank. The Effects of Money on Output and Prices: The
Monetary Transmission Mechanism, The Money Market, Supply of and Demand for Money, The Monetary
Mechanism, Monetary Policy in an Open Economy, Monetary Policy in the AD-AS Framework, Monetary
Effects in the Long Run.
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Economic Growth and Aggregate Supply: The Four Elements in Development: Human Resources, Natural
Resources, Capital Formation, Technological Change and Innovation. Theories of Economic Growth,
Determinants of Aggregate Supply, Aggregate Supply in the Short run and Long run.
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Business Cycles and Unemployment: Features of the Business Cycle, Business Cycle Theories,
Unemployment: Okun's Law, Impact of Unemployment, Economic Interpretation of Unemployment.
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Price Stability: Inflation: Definition of Inflation, Price Indexes, The Economic Impacts of Inflation, Modern
Inflation Theory: Prices in the AS-AD Framework, The Phillips Curve, Anti-inflation Policy.
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Classical, Keynesian and Post-Keynesian Macroeconomics: The Classical Tradition: Say's Law of Markets,
Policy Consequences, The Keynesian Revolution, Retreat from Keynes. The Monetarist Approach: The Quantity
Theory of Prices. Modern Monetarism, New Classical Macroeconomics: Rational Expectations, Implications for
Macroeconomics, Ultra-Classicism: Supply-Side Economics: Macroeconomic Policies.
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Economic Consequences of Debt: Budgets and Fiscal Policy, Definitions, Government Budget Policy,
Discretionary Fiscal Policy, Automatic Stabilizers, Fiscal Deficits: Concepts and Trends, Applications of
Cyclical and Structural Budgets. The Burden of Deficits and Debts, The Crowding-Out Controversy, CrowdingOut and the Money Market, Impact of Structural Deficits, Government Debt and Economic Growth, External vs.
Internal Debt.
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Policies for Growth and Stability: The Interaction of Monetary and Fiscal Policies.
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The Open Economy: International vs. Domestic Trade. Economic Basis for International Trade, The Principle
of Comparative Advantage, The Economic Gains from Trade, Protectionism : Supply-and-Demand Analysis of
Trade and Tariffs, The Determination of Foreign Exchange Rates, Floating Exchange Rate and Fixed Exchange
Rates. The Balance of Payments.
Strategies of Economic Development: The Backwardness Hypothesis, Industrialization vs. Agriculture, State
vs. Market, Growth and Openness.
International Financial Institutions: The International Monetary Fund (IMF), The World Bank, Asian
Development Bank, International Financial Corporation, Bank for International Settlements.
Macroeconomic Policies in India: An Overview of Monetary Policy, Fiscal Policy, Industrial Policy, Trade
Policy in India.
Current Developments.

Macroeconomic Analysis: An Overview
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Macroeconomics is the study of economy as a whole. As a field of study it analyzes the

causes of major problems such as high unemployment, rampant inflation, low wages, low
economic growth, and mounting trade deficits. It deals with both the short-term fluctuations
in output, employment and prices that called the business cycle and the long-term trends in
output and standards of living called economic growth. It is, therefore, important to know
about the forces that act behind growth and cycles for understanding the science of
macroeconomics. Macroeconomic analysis attempts to explain why problems arise in an
economy and how these problems can be dealt with. It is, therefore, indispensable for
formulating and conducting macroeconomic policy. Macroeconomic policy operates within a
framework of goals and constraints. The core objectives of a macroeconomic policy include
high output level, full employment, stable prices, trade balance, rapid economic growth, etc.
Generally, economists measure the macroeconomic performance by examining some of the
key variables Gross Domestic Product (GDP), the unemployment rate, and inflation. Thus,
macroeconomic analysis involves study and analysis of these key variables.
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Measurement of Macroeconomic Aggregates
The concepts like national income and national product are most significant in
macroeconomic accounting. As the accounting statement of a firm provides information on
the flow of revenues and expenses fully to show the firms performance, the national income
accounts supply similar information for the economy as a whole. They provide
comprehensive overview of how the economy is doing. Among the various aspects that shape
the economy is the nations capacity to produce goods and services and keep various factors
of production employed. The GNP growth rate, the most important indicator of the nations
economy, shows whether the nations income is expanding or contracting, and thus, it is the
broadest statistical aggregate of our economic output and growth. The estimates of GNP and
national income provide the policy makers and business community with the most useful tool
for analyzing an economys economic performance. In simple terms, GNP is the sum of all
final goods and services produced during a specified time period, usually a year, with each
class of goods and services measured at its market value, i.e. at price usually paid. In addition
to GNP, there are some other aggregates of national product such as GDP, NDP, and NNP
that measure a nations production of goods and services. GDP is the value at current
market prices or factor prices of the total final goods and services produced inside an
economy or country during a given time. By contrast, GNP is the value at current market
prices or factor prices of the total final goods and services produced during a year by the
factors owned by an economy or country. The difference between gross and net products is
depreciation. In words, depreciation is deducted from gross products to get net products.
When measuring GNP, or any other aggregate of national product, only the final value of
goods and services is to be considered. In other words, only the value added at each stage of
production process is considered while measuring GNP.
It is important to distinguish between real and nominal values of macroeconomic aggregates.

When comparing data at different points in time, economists often use terms such as real
wages, real income or real GNP. The real refers to the fact that the data have been adjusted
for changes in the level of prices. Thus real GNP in current rupees is estimated by deflating
the nominal GNP. This is done using GNP deflator. GNP deflator is a price index
constructed to a price index to reveal the cost of purchasing the items included in GNP during
the period relative to the cost of purchasing the same items in base year. Price indices are
measures of inflation. Apart from GNP or GDP deflator, there are two important price indices
the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Consumer Price
Index (CPI) is a price index that is used to measure the cost of a fixed basket of consumer
goods in which the weight assigned to each good is the proportionate of expenditures on that
good by consumers in the base year. The principles of construction of WPI are quite
analogous to those behind CPI. WPI considers producer goods and wholesale prices in
contrast to CPI. Weights are based on the value of transaction in various items in the base
year.
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Measurement of National Income
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The Simple Keynesian Model of Income Determination
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There are three methods of calculating national income, and they are all conceptually
equivalent to each other. They are (a) output method, (b) the expenditure method, and (c) the
income method. The output method is followed either by valuing all the final goods and
services produced during a year or by aggregating the values imparted to the intermediate
products at each stage of production by the industries and productive enterprises in the
economy. The sum of these values added gives the gross domestic product at factor cost,
which after a similar adjustment to include net factor income from abroad gives gross
national product at factor cost. The expenditure method aggregates all money spent by
private citizens, firms and the government within the year, to obtain total domestic
expenditure at market prices. It aggregates only the value of final purchases and excludes all
expenditures on intermediate goods. However, since final expenditure at market prices
include both the effects of taxes and subsidies and our expenditures on imports while
excluding the value of our exports, all these transactions have to be taken into account before
we obtain gross national product by this method. The income approach to measuring national
income does not simply aggregates all incomes. It aggregates only incomes of residents of
the nation, corporate and individual, that obtain income directly from the current production
of goods and services. It aggregates the money payments made to the different factors of
production, i.e. factors income and excludes all incomes which cannot be considered as
payment for current services to production.
The principal tool of analysis in the Simple Keynesian Model of Income Determination
model is the aggregate demand. The focus of this model is only the goods market and the
influence of the money market on the goods market. The model is build assuming that prices
do not change at all and that firms are willing to sell any amount of output at the given level
of prices (the aggregate supply curve is perfectly elastic). Aggregate demand is the total
amount of goods demanded in the economy and is equal to the sum of consumption spending
(C), investment spending (I), government purchases (G), and net exports (NX).
AD = C + I + G + NX
Equilibrium level of output is that level of output at which the total desired spending on
goods and services (desired aggregate demand) is equal to the actual level of output (Y).
The concept of multiplier is a very useful one. The multiplier tells what the increase in the
level of equilibrium income would be for a unit increase in autonomous spending. Multiplier
is given by the ratio of increase in equilibrium income to increase in autonomous spending.
The value of the multiplier is the reciprocal of the marginal propensity to save, assuming all
other components of aggregate demand I, G and NX are constant and independent of the
level of income. The larger the marginal propensity to consume, the lower is the marginal
propensity to save, and thus larger is the value of the multiplier.
Multiplier, = 1/MPS
Taxes play an important role in determination of disposable income. When tax is considered,
the value of the multiplier is equal to 1/[1 b (1 t)], where, b is the marginal propensity to
consume and t is the rate of tax. Thus, a cut in the tax rate would, therefore, increase the
value of multiplier.
The value of multiplier in the above case is determined assuming that the other components
of aggregate demand, I, G and NX are constant and independent of the level of income. But,
in real scenario, the imports are dependent of the level of the income. Mathematically,
imports (M) = M(Y) = mY, where m is the marginal propensity to import = M/Y. Thus, the
value of multiplier is equal to
1/[1 b (1 t) + m]
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Income Determination Model including Money and Interest
In the simple Keynesian model of income determination, we have determined the level of
income assuming that the investment being autonomous. And therefore we completely
avoided the role of interest rates (and money supply) in determining the level of income. But,
we know that interest rates and money supply have a major role to play in the economy.
IS-LM model is constructed by introducing interest rate as an additional determinant of

aggregate demand. This model illustrates how goods market (IS curve) and assets market
(LM curve) interact and determine income jointly.
The IS curve shows the combinations of interest rates and level of output such that planned
spending equals income. As interest rates and planned investment spending are inversely
related, the IS curve slopes downward. At equilibrium, (in goods market) Y = AD. But,
investment is a component of aggregate demand. Thus, the equilibrium output decreases
(increases) as interest rate rises (decreases), due to inverse relationship between interest rates
and planned investment expenditure. If the interest rate increases, ceteris paribus, interest
sensitive private investors reduce their investment spending, known as crowding out.
Asset market is a market in which money, bonds, stocks, houses and other forms of wealth
are traded. The demand for money is influenced by the level of real income and the interest
rate. It depends on the level of real income because individuals hold money to pay for their
consumptions, which in turn, depend on income. The demand for money depends also on the
cost of holding money. The cost of holding money is the interest that is forgone by holding
money rather than other assets. LM curve shows the combinations of income and interest rate
that produce equilibrium in the money market. The LM curve slopes upward. Because, if
there is an increase in income, the demand for money rises and this excess demand push the
market interest rates up. The real money supply is held constant along the LM curve, and
therefore, a change in the real money supply should shift the LM curve that an increase in
real money supply shift the LM curve down and to the right whereas a decrease in the real
money supply shift the LM curve up and to the right.
Points on the IS curve indicate equilibrium in the goods market and points on the LM curve
indicate equilibrium in the money market. For simultaneous equilibrium in both the goods
market and the money market, point indicating such equilibrium will have to lie on both the
IS and the LM curves. Such a point exists only at the intersection of the IS and LM curves.
Crowding out happens due to increase in interest rates, and therefore, can be reduced by
increasing the money supply.
Money is one of the most crucial elements of economic science. It acts as a medium of
exchange, unit of account, a standard of deferred payment and a store of value. Classical
economists viewed that money is demanded only for spending purposes. However, latter
Keynes recognized that money was held for other reasons too. In this view money would be
held as an asset, a non-interest-paying asset, whereby velocity is affected and tends to
change. According to him, the three motives for holding money are transactions, precaution
and liquidity or speculation.
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Fundamentals of Aggregate Demand and Aggregate Supply

The aggregate demand-supply model is the basic macroeconomic model for studying output
and price level determination. In short run, the interaction between aggregate demand and
aggregate supply determines the level of the output, employment, and capacity utilization as
well as the price level (the source of inflation). In the long run, a decade or more say,
aggregate supply is considered as the major factor behind economic development and wellbeing of a nation.
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The aggregate demand schedule (or curve) shows the combinations of the price level and the
level of output at which the goods and money markets are simultaneously in equilibrium. The
aggregate demand schedule (or curve) slopes downward owing to inverse relationship
between price level and the level of output demanded. In addition to price level, there are
other factors such as income levels, rate of interest, government policy, exchange rate,
expected rate of inflation and business expectations influence the aggregate demand in an
economy. When these factors or variables change, the aggregate demand curve will shift.
In short run, the aggregate supply curve slopes upward from left to right for part of its range
because at any point in time there is a limit on the output of goods and services. This limit
increases as with increased production, the availability of idle resources decreases and limit
is reached when the production reaches full employment level of output. When the resources
available are fully employed the short run aggregate supply curve becomes vertical. At this
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point, further increases in price level will have no effect on output. In short, the aggregate
supply curve, in short run, slopes upward from left to right for a part of its range and
straightens at the end.
In the short run, the discrepancy between actual and expected price level causes changes in
output and employment. But in the long run, if all other things remain constant, the higher
price level will come to be accurately expected by firms, narrowing down the difference
between expected and actual price levels. This is important because in the long run, the costs
incurred by business firms rise as economic agents reach to higher prices.
The higher level of output in the short run was possible only because the unanticipated rise in
the price level led to higher profits to business firms. As soon as the costs increase in line
with final prices, the incentive to produce higher levels of output disappears and the
production reverts to its original level. In this situation, the level of output will be at its
natural rate and deviations from this state are possible only when actual price level differs
from the expected price level in the short run. Thus, in the long run, the natural rate of output
is the equilibrium rate of output for the economy.
In the long run, the natural rate of output is the level of output to which the economy will
tend to adjust in the long run. This indicates that in the long run the average price level has no
effect on the level of output (Y). Any unanticipated price rise in the short run will be offset in
the long run by an increase in costs as contracts with the suppliers of inputs are renegotiated.
Therefore, in the long run the output of an economy does not depend on the price level, but
on factors such as, labor import costs, capital stock, technological progress, etc. These factors
are not influenced by changes in the average price level and so is the case with aggregate
supply in the long run. Therefore, in the long run, the aggregate supply of an economy is
vertical at the natural rate of output.
Most of the factors that affect the position of the aggregate supply curve in short run also
affect the position of the aggregate supply curve in the long run, with few exceptions. Some
of the important factors affect aggregate supply curve are change in costs of production,
supply shocks, investment spending and technological changes, availability of raw materials,
supply of labor, human capital and incentives.
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Money Supply and Banking System
Money is anything that serves as a commonly accepted medium of exchange. Money also
acts as a unit of value and a store of value. In past, commodities such as salt and oxen were
used as money but they failed to serve the purpose well. Latter, they were replaced by
precious metals such as gold, silver, etc. However, they too did not serve the purpose well.
All these were replaced by paper money as it has the basic features of good money, i.e.
portability, divisibility, durability, uniformity and storability.
Determining what should be included in the money supply is not as easy as it appears. Money
is sometimes defined as anything generally acceptable as a medium of exchange. Four
definitions of money are commonly used M1 to M4. M1 (known as narrow money) is made
up of currency with the public plus demand deposits with the banking system plus other
deposits with the RBI. M2 holds M1 plus post office savings bank deposits. M3 (known as
broad money) includes M1 plus time deposits with the banking system. And finally M4
includes M3 + total post office deposits (excluding national savings certificates).
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The Reserve Bank of India (RBI) issues money in the form of two rupee notes and above.
The central government also issues money in the form of one-rupee notes, coins and small
coins. The RBI currency plus the Government money constitutes the monetary base, which is
known as High Powered Money. The RBI currency together with the Government money
with the commercial banks is treated as Vault Cash. The deposits of the commercial banks
comprise of the balances maintained by the banks with the RBI. This is to ensure that the
commercial banks can meet all demands for withdrawals on the part of their depositors. The
banks may also choose to hold reserves over and above the statutory minimum, known as the
excess reserves. The commercial banks are required to maintain with the RBI a minimum of
Cash Reserve Ratio (CRR) as specified by the RBI on a fortnightly basis.
Commercial banks have the ability to multiple the money supply. The money supply
multiplier depends on the Cash Reserve Ratio (CRR) specified by the RBI and deposit ratio.
CRR specifies the percentage of deposits that every commercial bank must keep on deposit
with the Reserve Bank of India. In its simplest form, the money multiplier approach is based
on Ms = m. H equation, where m is the money multiplier and Ms is the broad money (M3)
and H is the high-powered money. However, m is equal to c + 1/c + r where c is the currency
deposit ratio and r is the reserve ratio. Currency deposit ratio depends on the attitude of the
people. But, reserve requirement is at the control of the RBI. Thus, RBI changes the reserve
ratio in order to manipulate the money supply in the economy.
The money supply in an economy is determined by the behavior of public in depositing their
income with the bank, the lending behavior of commercial banks, reserve ratio specified by
the RBI and some other factors.
The supply of and demand for money combinely determine the equilibrium of money
markets. The money markets will be in equilibrium when the quantity of real balances
demanded equals the quantity supplied.
A well-developed financial system is very essential for the smooth functioning of any
economy. One set of important statistical indicators that is used to look at the financial
development of a country is financial development ratios. These ratios are (i) Finance ratio,
(ii) Financial interrelations ratio, (iii) New issue ratio, and (iv) Intermediation ratio. Finance
ratio is the ratio of total financial claims issued during the year to national income of that
year. Financial interrelation ratio is the ratio of financial claims issued to net physical capital
formation. New issue ratio is the ratio of primary (new) issues by the non-financial sector to
the net physical capital formation. And intermediation ratio is the ratio of secondary issues to
primary issues.
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Aggregate Supply, Price Level and Employment: Macroeconomic

Equilibrium in the Classical Model
The aggregate supply curve describes the combinations of output and the price level, to
supply the given quantity of output. The amount of output that business firms are willing to
supply depends on the prices they receive for their goods and the amount they have to pay for
labor and other factors of production. Accordingly, the aggregate supply curve shows
conditions in the factor markets, especially, the labor market, as well as the good market.
From a historical standpoint it is very important to compare and contrast the views expressed
by the classical economists and J M Keynes. The main reasons are that the analysis has
different implications regarding a market economys tendency to adjust to full employment
and the relative effectiveness of monetary and fiscal measures.
According to classicals, the economy will always be at its full employment level of output.
At the full employment level of output, any employment, which might exist, is voluntary and
is referred to as the natural rate of unemployment, because output cannot be raised above its
current level even if the price level rises. There is no more labor available to produce any
extra output. Thus, the aggregate supply curve will be vertical (i.e. perfectly price inelastic
aggregate supply curve) at a level of output corresponding to full employment of the labor
force.
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This classical approach to analyzing economic behavior came under severe criticism due to
its unrealistic assumptions of wage price flexibility and the existence of voluntary
unemployment. In real world, all unemployment is certainly not voluntary. There are many
who wish to work but cannot find work implying the existence of involuntary unemployment.
J M Keynes and Keynesian economists disputed the classical assumptions and pointed out
that a perfectly efficient wage price flexibility is far from real world. Keynesian aggregate
supply curve is based on the assumption that the wage does not change much or change at all
when there is unemployment, and thus the unemployment can continue for sometime.
Aggregate Supply, Price Level and Employment Macroeconomic

Equilibrium in the Keynesian Model
Mainstream economic thought before Keynes emphasized the importance of supply-side
aspects of macroeconomic system. The classical economists did not concern themselves with
demand issues. They had faith in Says Law of Markets. According to this law, a general
overproduction of goods relative to total demand is impossible since supply or production
creates its own demand. Says law is based on the view that people do not work just for the
sake of working, but they work to obtain the income required to purchase the desired goods
and services. The capacity to purchase the desired products is generated by the production
process in the form of wages and salaries, rent, interest and profits. Classical economists
believed that is possible to produce too much of same type of goods (implying full
employment) and not enough of other type (implying no overproduction). In case of any
discrepancies between demand and supply, the mechanism of wage-price flexibility would
come into play automatically.
The Great Depression and its adverse impact on world economy undermined the classical
view and provided the foundation for the Keynesian analysis of the Great Depression, which
was completely a demand side approach. Keynes rejected the classical view and offered a
completely new concept of output determination. He believed that spending induced business
firms to supply goods and services. From this he argued that if total spending fell due to
pessimistic or unfavorable expectations about future, then business firms would respond by
cutting production which in turn led to less spending and less output and employment. The
classical economists were also aware of this possibility, but they believed the labor surplus
would drive down wages, reducing costs and lowering prices until the surplus was eliminated
and the economy was directed to full employment within reasonable time. Keynes and his
followers rejected this view, arguing that wage-price flexibility is an impossible proposition,
particularly in a downward direction in modern economies characterized by large corporate
sectors and powerful trade unions. Keynes also introduced a completely different concept of
equilibrium. In the Keynesian framework equilibrium takes place at a less than full
employment level of output. The Keynesian view of less than full employment or less than
full capacity output could be explained as aggregate expenditure or aggregate demand leads
to current level of output and employment. The business sector will produce only the quantity
of goods and services it believes households (i.e. domestic consumers and investing
community), government and foreigners will plan to buy. If this aggregate expenditure
consumption, investment, government spending and net exports is less than the economys
full capacity output, output will fall short of its potential capacity, which is the full
employment level of output. When aggregate expenditure is deficient, there are no automatic
forces, as believed by classical economists, capable of assuring full employment. The result
is that the actual output will be less than capacity output which in turn results in prolonged
unemployment and decline in output. This was how Keynes explained the Great Depression
highlighting the drawbacks of self-regulating private enterprise economies.
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Post-Keynesian Macroeconomics Monetarism, Rational Expectations and

Supply-side Economics
Keynesians suffered a major blow as their postulates failed to explain the happenings during
the post-1968 period when the rate of growth of output declined, the rate of inflation
increased coupled with rising unemployment. This paradox of stagflation is inconsistent with
the tenets of Keynesian economics that cyclical movements in prices and outputs relative to
trend are positively correlated. This led to reconsideration of theories underlying
policymaking and rival schools of thought such as Monetarist School, Rational Expectations
and Supply-side Economics (popularly known as Reaganomics). Supply-side economics
represent a return to orthodox classical economics and its recent more formal statement the
New Classical Macroeconomics.
The school of Monetarism argues that disturbances within the monetary sector are the
principal causes of instability in the economy. According to them, the money supply is the
principal determinant of the levels of output and employment in the short run and the price
level in the long run.
Rational Expectations School argues that expectations on the future values of economic
variables play an important role in macroeconomic analysis and economic analysis in
general. The hypothesis of rational expectations has three important implications for
macroeconomic analysis and policy.
The advocates of rational expectations school contend that their usefulness is limited,
because the parameters of the model will change when new policies are given
prominence over the others. Since estimates of the effects of the new policies are based
on the original set of parameters, the actual implications may be quite different. As a
result, economic models are considered not so helpful in selecting an appropriate policy
option.
b.
A W Phillips showed an inverse relationship between the ratio of change of money

wage rates and unemployment rate, it was argued that lower unemployment could be
obtained at the expense of higher inflation rates through more rapid increases in
affective demand. However, some economists argued that a trade-off existed in the
short run, but not in the long run. According to rational expectations, no trade-offs exist
even in the short run. It is because, if workers and business firms realize that any
disturbance leads to higher inflation, wages and prices (which are assumed to be
flexible in rational expectations model) will adjust automatically. Assuming full
employment in the economy, money wages and prices increase proportionately, leaving
the real wage and unemployment unaffected. Thus, according to rational expectations,
even though inflation has increased, the unemployment rate remains the same, implies
no trade-off between money wage rate and unemployment rate.
c.
Discretionary monetary and fiscal policy cannot be used to stabilize the economy.
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Supply side economics is a view emphasizing policy measures to affect aggregate supply or
potential output. This approach holds that high marginal tax rates on labor and capital
incomes reduce work effort and saving.
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Economic Fluctuations and Unemployment
A business cycle is a swing in total national output, income and employment marked by
widespread expansion or contraction in many sectors of the economy. Typically, a business
cycle is divided into four phases: (i) the recovery or revival of economic activity (ii) the
prosperity or expansion of the activity (iii) the recession or downturn in economic activity,
and (iv) the depression or contraction in the economic activity.
A number of theories are proposed to explain the cyclical behavior of business cycles, which
includes supply shock theory, multiplier-acceleration and Keynes. But, no theory answered
all problems.
The rate of unemployment is one of the key indicators of the conditions prevailing in an
economy. Fluctuations in the rate of employment lead to partial changes in the economy and
therefore considered as a barometer which points out the condition of an economy. The rate
of unemployment gradually decreases during recovery and rapidly decreases during boom or
prosperity. By contrast, unemployment rate rises sharply during depression and gradually
moves upward during recession. Unemployment rate and phases of business cycles are
closely knitted.
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Price Stability
An increase in the general level of prices in an economy that is sustained over a period of
time is called inflation. Inflation plays a major role in an economy. Inflation is a major
concern of the governments world over. The effect of inflation on the economy is widespread
in its reach, ranging from redistribution of income and wealth among different sections of the
society to the worsening of balance of payments position.
The inflation may be demand-pull or cost-push. A demand-pull inflation refers to increase in

price level due to increased or excess demand. Cost-push inflation refers to rise in general
level of prices due to increased cost of production.
The Phillips curve shows the relationship between inflation and unemployment. When
tracing the link between rate of change in wages and unemployment over nearly a century for
the United Kingdom, Phillips discovered an inverse relationship.
7
The Open Economy and Balance of Payments: Indias Balance of Payments

All countries have economic transactions with other countries. These consist of import and
export of goods and services, official and private gifts and donations, lending and borrowing
abroad and investment abroad in financial and physical assets. The Balance of Payments
(BoP) is a record of all transactions that a country has with the rest of the world during a
period.
The BoP is a regular double entry accounting record with transactions that increase the
availability of foreign exchange recorded as credits and those that use up foreign exchange
recorded as debits. Thus, exports are a credit item. The BoP is divided into a current account
consisting of transactions involving imports, exports, remittances and gifts and a capital
account, which consists of all transactions that affect the countrys foreign exchange assets or
liabilities.
The BoP data helps in analyzing whether a particular course of action is likely to be helpful or
not in eliminating or reducing a current account deficit. At the same time, BoP data cannot be
considered in isolation for predicting a movement in the exchange rates.
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Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government

Debt
Governments in modern economies play a very important role in the economic process. They
collect taxes, provide a variety of services and often undertake production and distribution of
goods using inputs purchased from the rest of the economy. They borrow on the capital
market and from financial institutions and are engaged in capital formation.
The levels in composition of taxes, the volume and composition of government expenditures
and the level of public debt all have significant microeconomic and macroeconomic effects.
Fiscal policy, narrowly interpreted, refers to actions governing and volumes of government
expenditure (and hence the resulting deficits or surpluses) and government borrowing. In a
broader sense it refers also to the structure of taxation, composition of expenditure, methods
of financing deficits and composition of public debt. Fiscal policy is normally the
responsibility of the finance ministry or the treasury.
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A glance at the development or evolution of monetary policy will reveal that its objectives
and emphasis have been undergoing significant changes. The monetary policy of any country
refers to the regulatory policy, whereby the monetary authority maintains its control over the
supply of money for the realization of general economic objectives such as stable prices, full
employment, etc. However, in the context of developing economies like India, monetary
policy acquires a still wider role and it has to be designed to meet the particular requirements
of the economy. Monetary policy as an instrument of economic policy has certain advantages
when compared to fiscal policy. The lag between the time when action is needed and when
action is actually taken is shorter in the case of monetary policy than fiscal policy. The
important tools of monetary policy are
Minimum reserve requirements
Discount or bank rate
Open Market Operations (OMO).
As per minimum reserve requirements, the commercial banks are required to maintain a
minimum amount of balance with the Central Bank. This may be maintained either in the
form of chest cash or in the form of deposits. A certain proportion of the total deposit
liabilities, fixed by the Central Bank, is maintained by the commercial banks as statutory
reserves. The Central Banks power to set the reserve requirements provides it with great
powers over the lending behavior of the commercial banks. By changing the reserve
requirement from time to time, it can directly influence the lending capacity of the banking
system.
Bank rate or discount rate refers to rate at which commercial banks can rediscount their bills
with the Central Bank. By changing the bank rate, the Central Bank changes the cost of
money supply with the commercial banks and therewith influences the incentive of the banks
to borrow reserves.
Open market operations involve purchase and sale of securities (generally government
securities) by the Central Bank, to regulate the credit creating capacity of the commercial
banks. When the Central Bank purchases securities it makes cheque payment to the sellers.
The sellers deposit the cheques with the commercial banks, which automatically raise their
reserve base. An increase in the reserve base of the banks provides a basis to multiple
expansions of credit and deposits. Similarly, when the Central Bank performs open market
sale of securities, it results in decrease in the bank reserves. So it can be said that, an open
market purchase is expansionary in its effect and an open market sale is contractionary in its
effect from the point of view of credit creation.
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Part I: Questions on Basic Concepts

Which of the following variable(s) will come under stock variable(s)?
b.
Gross domestic product.
c.
Money supply.
d.
Exports.
e.
Both (a) and (c) above.
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Consumer price index.
The relationship between aggregate consumption expenditure and aggregate income of

household sector is known as ________ function.
Consumption
b.
Saving
c.
Expenditure
d.
Income
e.
None of the above.
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Gross Domestic Product and Gross National Product
b.
Gross Domestic Product and GDCF (Gross Domestic Capital Formation)
c.
National Disposable Income and Gross Domestic Product
d.
GDP and Aggregate Consumption
e.
National Disposable Income and Gross National Product.
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Which of the following variable(s) will come under flow variable(s)?

Unemployment.
b.
Foreign exchange reserves.
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Gross domestic savings is the difference between
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Consumption.
Money supply.
e.
Both (a) and (b) above.
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d.
The act of replacing worn out assets and creating new assets is capital formation. Then Gross
Domestic Capital Formation (GDCF) consists of
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Making good the depreciation on existing fixed assets

Adding to the stock of fixed assets
c.
Adding to inventories
d.
Both (a) and (b) above
e.
All of (a), (b) and (c) above.
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Which of the following relationships is not correct?

a.
Net national savings = National Disposable Income (NDI) Private consumption

expenditure Government expenditure on current goods and services.
b.
Net domestic saving = Net national saving + Retained earnings of foreign companies.
c.
Gross domestic saving = Net domestic saving + Depreciation provision.
d.
Gross domestic investment = Gross fixed investment + Change in inventories.
e.
Gross domestic product = Consumption + Gross investment + Government expenditure

+ Exports.
Part I
If GDP is growing at g% per annum and population at p% per annum, the per capita GDP
must be growing at __________ %.
1+ g
1
1+ p
b.
(g + p)/2
c.
(g p)/2
d.
(p g)
e.
None of the above.
How the prices of resources, goods and assets are determined
c.
How resources are distributed
d.
How production and household sectors interact through markets
e.
Both (b) and (d) above.
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a.
Which of the following statements is not true with respect to stock and flow variables?
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The circular flow model of a free enterprise economy shows
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Both variables have time dimension.
b.
Flow variables are always determined by stock variables.
c.
Stock variables are usually affected by flow variables.
d.
All flow variables need not have stock variable counterparts.
e.
Flow variables are partly determined by stock variables.
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10. Which of the following is a leakage from the circular flow of income?
Mr. Ramesh bought an Indian made color television for Rs.15,000.
b.
Mr. Babu bought a second hand refrigerator from his friend Rajesh.
c.
Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh.
d.
Mr. Sujit paid Rs.10,000 to his personal secretary towards salary.
e.
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11. Which is the best indicator of economic development of a developing country like India?
National income deflator.
b.
GNP at current prices.
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Real national income.
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d.
Per capita real national income.
e.
GDP deflator.

12. If GNP deflator is raised by 40% then which of the following statements is correct?
a.
Nominal GNP will increase at least by 40%.
b.
Real GNP will increase at least by 40%.
c.
Both nominal GNP and real GNP will increase by 40%.
d.
Nominal GNP will increase by 40% but real GNP will decrease by 40%.
e.
Real GNP will increase by 40% but nominal GNP will decrease by 40%.
11
Macroeconomics
13. Which of the following will certainly increase real and nominal GNP?
a.
Production of more goods and services and decrease in prices.
b.
Production of more goods and services and rise in prices.
c.
Production of less goods and services and rise in prices.
d.
Production of less goods and services and decrease in prices.
e.
Production of less goods and services and rise in inflation.
14. In an economy narrow money is equal to the sum of ________.

RBI currency notes in circulation.
ii.
Rupee coins and notes in circulation.
iii.
Small coins.
iv.
Demand deposits with banks and other deposits with RBI.
a.
Both (i) and (ii) above
b.
Both (ii) and (iii) above
c.
Both (i) and (iii) above
d.
Only (i), (ii) and (iv) above
e.
All of (i), (ii), (iii) and (iv) above.
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RBI currency notes in circulation.
ii.
Rupee coins and notes and small coins in circulation.
iii.
Time deposits with banks.
iv.
Demand deposits with banks and other deposits with RBI.
a.
b.
Only (ii), (iii) and (iv) above
c.
Only (i), (ii) and (iii) above
d.
Only (i), (ii) and (iv) above
e.
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16. In country X, if NNP at market price remained constant and depreciation increased
compared to the previous year then GNP at market prices will _____.
Increase
b.
Decrease
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Increase by an amount equal to rise in depreciation
d.
Decrease by an amount equal to rise in depreciation
e.
Not change.
17. Which of the following method values the final goods and services produced during a year,
by aggregating the values imparted to the intermediate products at each stage of production
by the industries and productive enterprises in an economy?
12
a.
Expenditure method.
b.
Income method.
c.
Input method.
d.
Output method.
e.
Saving method.
Part I
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18. The ________ measurement method of national income aggregates all the money spent by
private citizens, firms and the government within the year.
a. Expenditure
b. Income
c. Input
d. Output
e. Saving.
19. Which of the following ratios best describes the GNP deflator?
a. Nominal GNP to real GNP.
b. Real GNP to nominal GNP.
c. Nominal GNP to real GDP.
d. Real GNP to nominal GDP.
e. Nominal GDP to real GDP.
20. GDP at market price exceeds GDP at factor cost by the amount of revenue raised through
_______.
a. Direct taxes
b. Indirect taxes
c. Income tax
d. Tax on rents
e. Both (b) and (c) above.
21. Which of the following is not true in representing the GDP at market price and GDP at factor
price?
a. In GDP at factor price, indirect taxes are not considered.
b. In GDP at factor price, subsidies are not considered.
c. In GDP at market price, exports are considered.
d. In GDP at market price, exports are not considered.
e. In GDP at factor price, exports are considered.
22. Macroeconomics is the study of
a. Inflation
b. Unemployment
c. Growth
d. Both (a) and (b) above
e. All of (a), (b) and (c) above.
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23. If the average rate of inflation in the USA and Japan between the years 1960-1973 is 3.2%
and 6.1% respectively, then the growth rate of ______.
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USA will be more
b.
Japan will be more
c.
USA will be twice that of Japan
d.
Japan will be twice that of USA
e.
No definite conclusion can be made.
24. In a closed economy savings are equal to __________ at the equilibrium level of income.
a.
Investments
b.
Wages
c.
Income-Investments
d.
Wages-Consumption
e.
None of the above.

13
Macroeconomics
25. Which of the following methods is/are used for measuring national income?
a.
Output method.
b.
Expenditure method.
c.
Income method.
d.
e.
26. Net factor income from abroad is equal to

NNP at market prices NDP at market prices
b.
NDP at market prices Indirect taxes + Subsidies
c.
NDP at factor cost + Depreciation
d.
NDP at factor cost Depreciation
e.
NNP at market prices + Depreciation.
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The difference between current and capital account
b.
The difference between merchandize export and imports
c.
Same as the balance of current account
d.
Same as the balance of capital account
e.
Same as the overall balance of payments.
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28. Personal disposable income is equal to _______

Wages and salaries Personal income tax
b.
Wages and salaries + Dividends paid at home Personal income tax
c.
Wages and salaries + Dividends paid at home + Factor income received from
abroad Personal income tax
d.
abroad + Transfers from government Personal income tax
e.
abroad Transfers from government Personal income tax.
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29. Personal income equals personal disposable income (Yd) plus

Personal savings
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a.
Transfers from government
c.
Personal income taxes
d.
Dividend payments
e.
Both (b) and (c) above.
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30. The Net Domestic Savings of an economy is defined as
14
a.
Net national savings less retained earnings of foreign companies
b.
Net national savings plus retained earnings of foreign companies
c.
National disposable income less consumption of household and government sectors
d.
Gross national savings less depreciation provisions
e.
National disposable income plus consumption of household and government sectors.
Part I
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Services of a teacher.
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31. GDP at market prices is the sum of Consumption, Investment, Government spending and Net
Exports.
Net exports is
a. Gross exports minus depreciation
b. Exports minus imports
c. Gross exports earnings minus capital inflow
d. Export minus imports of merchandize
e. Imports and depreciation.
32. GDP at factor cost and GDP at market prices are both measures of output in the economy.
The item(s) that give(s) rise to the difference(s) in the two measures is/are
a. Direct taxes and subsidies
b. Direct taxes net of subsidies
c. Indirect taxes and subsidies
d. Direct taxes and depreciation
e. Indirect taxes and depreciation.
33. Which of the following is/are not included in the computation of GNP?
a. Spending for National Defense.
b. Rs.10,000 spent by a local government to fight crime.
c. The price paid for a stolen car.
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34. Macroeconomics is concerned with
The level of output of goods and services
b.
The general level of prices
c.
The growth of real output
d.
All of the above
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e. None of the above.

35. Real GNP increases
a. When there is an increase in the price level
b. When there is an increase in the output of goods and services
c. When there is an increase in the price level and/or the output of goods and services
d. All of the above
36. The circular flow of income for a private sector model shows
a. The flow of income between the household and business sectors
b. The flow of income between the government and business sectors
c. The flow of income between the household, business and government sectors
d. The flow of income to the household and government sectors
e. All of the above.
37. In a model in which there is no government, net investment, capital replacement or
international trade, the market value of final output equals
a. Aggregate consumption
b. The sum of the receipts of economic resources
c. The sum of wages, rent, interest and profit
d. All of the above
15
Macroeconomics
38. Which of the following is not included in gross investment?

a.
Business and residential construction.
b.
Expenditures on consumer goods.
c.
Additions to business inventory.
d.
Expenditures on machinery.
e.
None of the above.
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39. In a model in which there is a household, business, government and foreign sector, GNP is
the sum of
Consumption, gross investment, government spending for goods and services, and net
exports
b.
Consumption, net investment, government spending for goods and services, and net
exports
c.
Consumption, gross investment, government spending for goods and services, and gross
exports
d.
Wages, rent, interest, profit and depreciation
e.
All of the above.
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Household saving always equals net investment
b.
Household saving always equals gross investment
c.
Household saving plus depreciation always equals gross investment plus government
spending
d.
Household saving plus taxes equals net investment plus government spending
e.
None of the above.
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41. Which of the following is not correct?
NNP Direct taxes equals national income.
b.
NNP + Capital consumption allowances equals GNP.
c.
Gross investment equals net investment plus depreciation.
d.
Personal income equals disposable personal income plus direct taxes.
e.
None of the above.
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b.
Undistributed corporate profits
c.
d.
Dividend payments
e.
Personal savings.
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42. Personal income includes all of the following except
43. Nominal GDP is
16
a.
The total value of goods and services net of exports
b.
The total value of goods and services at prices corrected for inflation
c.
The total value of goods and services produced during periods of low unemployment
d.
The total value of goods and services measured at current prices
e.
The total value of goods and services produced at full employment.
Part I
44. GDP at factor cost exceeds GDP at market price

a.
When the factor income from abroad is negative
b.
When the factor income from abroad is positive
c.
When depreciation on fixed capital exceeds income in investment
d.
When direct tax exceeds indirect tax
e.
When subsidies exceed indirect taxes.
45. The difference between Gross National Product (GNP) and Gross Domestic Product (GDP) is
Excess of subsidies over indirect taxes
b.
Depreciation
c.
Net foreign income from abroad
d.
Excess of indirect taxes over subsidies
e.
Personal disposable income.
M
AC
04
20
04
04
a.
ef
.N
o.
46. NDP does not include

Payments made for income taxes
b.
Depreciation allowances
c.
Undistributed profits
d.
Net exports
e.
The value added from intermediate goods.
:8
1-
31
4-
02
27
-4
a.
BN
47. Which of the following is not correct?

NNP + Indirect taxes = National Income.
b.
GNP = NNP + Depreciation.
c.
Saving + Taxes = Investment + Government Spending.
d.
Personal Income = Disposable Income + Direct Taxes.
e.
Gross Investment = Net Investment + Depreciation.
ed
se
rv
re
ht
ig
lr
s.
Al
Pr
es
48. National income is
NDP at market prices
b.
NNP at market prices
c.
NDP at factor cost
d.
NNP at factor cost
fa
iU
ni
ve
rs
i
ty
a.
Ic
GNP at market prices.
Th
e
e.
.IS
a.
20
04
49. Which of the following statements is/are true?

i.
Every increase in real GDP will necessarily improve the welfare of the people.
ii.
Foodgrains retained by the farmers are excluded from the computation of GDP.
iii.
GNP at market prices is also known as National Income.
iv.
Transfer payments are not taken into account while computing national income.
a.
Both (i) and (ii) above.
b.
Both (ii) and (iii) above.
c.
Both (iii) and (iv) above.
d.
Only (ii) above.
e.
Only (iv) above.

17
Macroeconomics
50. Which of the following is not included in GDP of India?

a.
Depreciation written off by Reliance Industries Ltd.
b.
Profits before tax earned by Ford Motors Ltd. in India.
c.
Salaries paid by Satyam Infoway to an American consultant at its Chennai office.
d.
Salaries paid by Microsoft USA to Indian programmers employed at New York.
e.
Dividends earned by a Foreign Institutional Investor in India.
51. GDP is not a very good measure of economic prosperity because

The expenditure and production methods to GDP yield different results because of
conceptual problems
b.
It does not include non-monetized transactions/activities
c.
It is purely a monetary measure
d.
It does not include environmental degradation
e.
M
AC
04
20
04
04
a.
o.
52. Which of the following statements is not true?

GDP deflator is also known as implicit price deflator.
b.
GDP deflator reflects the change in overall price level of the economy.
c.
GDP deflator is the most comprehensive index of prices.
27
-4
ef
.N
a.
GDP deflator reflects on the purchasing power of the people.
e.
GDP deflator measures economic growth.
31
4-
02
d.
Residential investment
BN
a.
:8
1-
53. The difference between personal disposable income and personal income is
ed
Subsidies
se
rv
c.
.IS
b. Indirect taxes
Personal taxes.
ht
e.
re
d. Transfer payments
s.
Al
lr
ig
54. When the addition to capital goods in an economy is more than the capital consumption
allowance, the economy experiences
Negative net investment
b.
Zero net investment
c.
Positive net investment
d.
Negative gross investment
e.
Zero gross investment.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
a.
Nominal GNP to real GNP.
b.
Real GNP to nominal GNP.
c.
Nominal GNP to real GDP.
d.
Real GNP to nominal GDP.
e.
None of the above.
20
04
Th
e
Ic
55. Which of the following ratios best describes the GNP deflator?
56. Which of the following is an example of a government transfer payment?
18
a.
Salary paid to a soldier.
b.
Purchase of a new car for the Ministry of Finance.
c.
Funding of a clinic to provide free vaccinations.
d.
Free food coupons issued to persons in an anti-poverty program .
e.
Funding of a new bridge in an urban area.
Part I
57. Which of the following price indices is/are most widely used for determining of inflation in
India?
a.
Wholesale Price Index (WPI).
b.
GDP deflator.
c.
Consumer Price Index (CPI).
d.
e.
58. Which of the following is considered as an investment?

Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5
years.
b.
Barucha invests Rs.5,000 in equity shares of a company.
c.
Charlie and Co. accumulates unsold inventory worth Rs.1,000 .
d.
Delta Corp. buys ten used vehicles to strengthen its transportation fleet.
e.
None of the above.
o.
M
AC
04
20
04
04
a.
ef
.N
59. The net factor income earned within the domestic territory of a country must be equal to
Net Domestic Product at factor cost
b.
Net Domestic Product at market price
c.
Net National product at factor cost
d.
Net National Product at market price
e.
Personal income.
BN
60. Both dividends and corporate taxes are part of
:8
1-
31
4-
02
27
-4
a.
Corporate profits.
ii.
National income.
i.
Personal income.
iv.
Personal disposable income.
a.
b.
c.
d.
(i), (ii) and (iii) above
e.
(i), (ii) and (iv) above.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
20
04
Th
e
a.
Ic
fa
iU
61. Which of the following indices necessarily gives higher weights to services like doctor fees,
railway and bus fares?
Consumer Price Index (CPI).
b.
Wholesale Price Index (WPI).
c.
Index of Industrial Production.
d.
GNP deflator.
e.
GDP deflator.
62. Which of the following would not be included in GDP?

a.
Bobby purchases a new suit to wear at work.
b.
Amok purchases a new Ford car.
c.
Community Bank purchases new computers for its loan office.
d.
Margaret grows tomatoes in her home garden
e.
Ford India produces but could not sell 100 cars.

19
Macroeconomics

63. The ratio of the change in equilibrium output to the change in autonomous spending that
causes change in output is called
a.
Marginal propensity to consume
b.
Marginal propensity to save
c.
Average propensity to save
d.
Multiplier
e.
Average propensity to consume.
20
04
04
64. In an economy consumption function is equal to 12 + 0.6Y [then which of the following
statements are true?
Marginal propensity to consume is 0.6.
ii.
Marginal propensity to save is 0.4.
iii.
Marginal propensity to consume is 0.4.
iv.
Marginal propensity to save is 0.6.
v.
Autonomous consumption demand is 12.
a.
Both (iii) and (v) above.
b.
Both (iv) and (v) above.
c.
Only (iii), (iv) and (v) above.
d.
Only (i), (ii) and (v) above.
e.
Only (ii), (iii) and (v) above.
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
i.
BN
65. The rachet effect is the situation where households find

It difficult to adjust to rising incomes than falling income
b.
It easier to adjust to rising incomes than falling income
c.
Supply of goods not sufficient, due to low production
d.
That inflation is the only reason for high cost consumption
e.
It is difficult to save, due to low income.
lr
ig
ht
re
se
rv
ed
.IS
a.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
66. Changes in subjective and objective factors of households

a. May cause upward or downward shifts of the consumption function
b. May cause upward shifts of the consumption function
c. May cause downward shifts of the consumption function
d. Never effect consumption function
e. May cause upward shift of saving function.
67. The slope of the consumption function represents _______.
a. Average Propensity to Save (APS)
b. Marginal Propensity to Save (MPS)
c. Marginal Propensity to Consume (MPC)
d. Average Propensity to Consume
e.
Level of Consumption in the Economy.
68. The balanced budget multiplier is not affected by
20
a.
b.
Marginal propensity to import
c.
Investment function of the economy
d.
Proportional income tax rate levied by the government
e.
Part I
69. Which of the following is false?

a.
The naive consumption function assumes a constant marginal propensity to consume.
b.
The naive consumption function assumes that the autonomous component of

consumption is constant.
c.
The average propensity to consume can never exceed unity.
d.
As income increases, the average propensity to consume decreases.
e.
Both (c) and (d) above.
b.
A parameter whose value depends upon the level of disposable income
c.
A behavioral coefficient
d.
A dependent variable
e.
None of the above.
04
The autonomous part of consumption, independent of the level of income, Y
M
AC
04
20
a.
04
70. In the equation C = C + cY, C is
ef
.N
o.
71. Which of the following statements is correct?
A variable is endogenous when its value is determined by forces outside the model.
b.
A change in an exogeneous variable is classified as an autonomous change.
c.
A variable is exogenous when its value is determined by forces within the model.
d.
A variable is autonomous when its value is determined by forces within the model.
e.
All of the above.
1-
31
4-
02
27
-4
a.
BN
:8
72. In stating that C = f(Yd, W)
It is hypothesized that Yd is a more important determinant of C than W
b.
It is hypothesized that W is a more important determinant of C than Yd
c.
W and Yd are dependent variables explaining C
d.
Yd and W are independent variables explaining C
e.
ig
ht
re
se
rv
ed
.IS
a.
s.
Al
lr
73. Equilibrium occurs in a two-sector model when

Saving equals investment
Pr
es
a.
Consumption plus investment equals the value of output

Planned saving equals planned investment
d.
Aggregate spending equals the revenues of the business sector
e.
All of the above.
fa
iU
ni
ve
rs
i
ty
b.
c.
a.
Output should increase
b.
Output should decrease
c.
Output should not change
d.
Any of the above can happen
e.
None of the above.
20
04
Th
e
Ic
74. When planned saving is greater than planned investment,
75. When the value of output exceeds planned spending

a.
There is unsold output, and the level of income will fall
b.
There is unsold output, and the level of income will rise
c.
There is no unsold output, and the level of income does not change
d.
Any of the above can happen
e.
None of the above.

21
Macroeconomics
76. By definition, the marginal propensity to consume

a.
Equals C/Yd
b.
Is the behavioral coefficient c in the equation C = a + cYd
c.
Is the slope of the consumption function
d.
All of the above
e.
None of the above.

The change in income to the change in autonomous spending
b.
The change in autonomous spending to the change in income
c.
The change in consumption to the change in income
20
04
The change in income to the change in consumption

All of the above.
M
AC
d.
e.
04
a.
04
77. The value of the expenditure multiplier relates
A movement along a spending line
b.
A shift of a spending line
c.
A change in a behavioral coefficient
d.
Both (a) and (c) above
e.
None of the above.
31
4-
02
27
-4
ef
.N
a.
o.
78. A change in autonomous spending is represented by
1-
79. When Ct = f(Yd, t 1)
There is an imperfect relationship between consumption and disposable income
b.
There is no relationship between consumption and disposable income
c.
Consumption spending lags the receipt of disposable income by one period
d.
The receipt of disposable income lags consumption spending by one period
e.
re
se
rv
ed
.IS
BN
:8
a.
ig
ht
80. Dynamic multipliers occur when
The assumption of ceteris paribus is dropped
b.
The economy is not in equilibrium
c.
Consumption is unrelated to disposable income
d.
There is a lagged response between consumption and disposable income
e.
None of the above.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
a.
Th
e
b.
20
04
There is net credit balance in the merchandize account
Foreign exchange outflows on account of imports of goods and services and gifts made
exceed inflows on account of exports of goods and services received
d. Decrease in Foreign Exchange Reserves
e. Increase in Foreign Exchange Reserves.
82. Which of the following will not result in an increase in the level of income?
a. An increase in autonomous spending.
b. A decrease in autonomous taxes.
c. An increase in autonomous transfers.
d. An increase in net tax revenues.
e. Both (a) and (d) above.
83. Ceteris paribus, an income tax
22
c.
There is net debit balance in the merchandize account
Ic
a.
fa
iU
81. A current account deficit implies that
Part I
a.
Increases the value of the expenditure and net tax revenue multiplier
b.
Increases the value of the expenditure multipier and decreases the value of the net tax
revenue multiplier
c.
Decreases the value of the expenditure and net tax revenue multiplier
d.
Decreases the value of the expenditure multiplier and increases the value of the net tax
revenue multiplier
e.
None of the above.
84. If the net export balance is zero, an increase in autonomous investment spending will
Increase the net export balance and the income level
b.
Increase the income level but make the net export balance negative
c.
Increase the income level and have no effect upon the net export balance
d.
Have no effect upon the income level but cause the net export balance to become
negative
e.
None of the above.
o.
M
AC
04
20
04
04
a.
ef
.N
85. An increase in the marginal propensity to import
Has the same effect upon the multipliers as an increase in the MPC
b.
Has no effect upon the multipliers
c.
Increases the value of the multipliers
d.
Decreases the value of the multipliers
e.
None of the above.
:8
1-
31
4-
02
27
-4
a.
ed
.IS
BN
86. When an investment spending is negatively related to the rate of interest, equilibrium income
in the goods market
Is unrelated to the rate of interest
b.
Is inversely related to the rate of interest
c.
Is positively related to the rate of interest
d.
Falls as the rate of interest decreases
e.
None of the above.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
87. Given the consumption function C = 256 + 0.85Y, we may infer that, as Y increases
Average propensity to consume remains constant
b.
The marginal propensity to consume and average propensity to consume will be

decreasing
c.
The average propensity to consume is constant but marginal propensity to consume will
be decreasing
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
a.
d.
The average propensity to consume will be decreasing but marginal propensity to

consume will be constant
e.
Both the average and marginal propensity to consume will be constant.
88. Which of the following will not increase the value of multiplier?
a.
Increase in marginal propensity to consume.
b.
Increase in marginal propensity to save.
c.
Decrease in tax rate.
d.
Decrease in marginal propensity to import.
e.
None of the above.
89. When the balanced budget multiplier is equal to one, increase in government expenditure and
23
Macroeconomics
the tax revenue by 100 will

a.
Not change the equilibrium income
b.
Increase the equilibrium income by 100
c.
Increase the equilibrium income by less than 100
d.
Decrease the equilibrium income by 100
e.
Decrease the equilibrium income by more than 100.
90. Which of the following statements is true?

The value of Marginal Propensity to Consume (MPC) lies between zero and infinity.
b.
The value of multiplier lies between 0 and 1.
c.
The value of multiplier lies between 1 and infinity.
d.
The value of multiplier is the inverse of MPC.
e.
In the linear consumption function average propensity to consume is constant.
M
AC
04
20
04
04
a.
o.
Relative Income Hypothesis asserts that people can quickly and easily adjust their living
standards downwards but upward adjustment is very difficult.
b.
Permanent Income Hypothesis states that the transitory component of income

significantly influences the consumption behavior.
c.
Relative income hypothesis assumes that marginal propensity to consume and hence
multiplier are constant.
d.
Life Cycle Hypothesis states that the saving behavior of the individuals during their
working life is motivated by their desire to maintain consumption levels after
retirement.
e.
Relative Income Hypothesis states that marginal propensity to consume is lower for
increase in income than for decrease in income.
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
a.
ht
92. On the basis of the Keynesian model of output determination, a multiplier of 3 implies that
An increase in consumption by Rs.3 will result in an increase in investment by Re.1
b.
An increase in investment by Re.1 will result in an increase in consumption by Rs.3
c.
d.
e.
An increase in income by Re.1 will result in an increase in investment by Rs.2.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
iU
93. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
Monetary liabilities of the RBI increases.
Ic
fa
a.
High-powered money in the economy decreases.
c.
The value of money multiplier decreases.
d.
Aggregate demand in the economy increases.
e.
Price level in the economy increases.
20
04
Th
e
b.
94. Consumption demand does not depend upon the level of

a.
Income
b.
Propensity to consume
c.
Propensity to save
d.
Consumer spending.
e.
Marginal efficiency of investment.
95. The slope of the consumption curve connotes

24
Part I
a.
Average propensity to save
b.
Average propensity to consume
c.
Marginal propensity to consume
d.
e.
Level of consumption in the economy.
ii.
Multiplier value will be larger.
iii.
Average propensity to consume will be larger.
iv.
Autonomous consumption will be higher.
a.
b.
c.
(ii), (iii) and (iv) above
d.
(i), (ii) and (iii) above
e.
Both (iii) and (iv) above.
04
Marginal propensity to save will be larger.
-4
ef
.N
o.
M
AC
04
20
i.
04
96. Given that the marginal propensity to consume is larger, which of the following statements
are true.
27
Income Determination Model Including Money and Interest
31
4-
02
97. The curve explains the combination of interest rates and levels of output at which planned
spending equals income.
IS
b.
LM
c.
MPC
d.
MPS
e.
AD.
re
se
rv
ed
.IS
BN
:8
1-
a.
ht
98. Which of the following statements is/are incorrect?

The IS curve shifts to the left if the tax rate increases.
b.
The IS curve shifts to the right if tax rate and government expenditure increases.
c.
The IS schedule shifts to the right if the interest rate falls.
d.
The IS schedule shifts to the right if the interest rate rises.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
iU
ni
99. Which of the following statements is/are true regarding IS curve?

Larger the multiplier, steeper the IS curve.
Ic
fa
a.
Larger the multiplier, flatter the IS curve.
c.
As the taxes increase, the IS curve becomes steeper.
d.
As the taxes decrease, the IS curve becomes steeper.
e.
20
04
Th
e
b.
100. An autonomous increase in investment

a.
Does not affect the IS curve
b.
Shifts the LM curve to the left
c.
Shifts the IS curve to the left
d.
Shifts the IS curve to the right
e.
Makes the IS curve flat.
101. The LM schedule shifts

25
Macroeconomics
a.
To the right, if the supply of money increases
b.
To the right, if the demand for money increases
c.
To the left, if the supply of money increases
d.
To the left, if the demand for money decreases
e.
102. At interest rate r there is a simultaneous equilibrium in goods and money markets. If
interest rate increases from r to r1 then
Equilibrium in goods market will be at a point higher than the existing income
b.
Equilibrium in money market will be at a point higher than the existing income
c.
Equilibrium in goods market does not change but equilibrium in money market will be
at a point higher than the existing income
d.
Equilibrium in money market does not change but equilibrium in goods markets will be
at a point higher than the existing income
e.
o.
M
AC
04
20
04
04
a.
ef
.N
103. Which of the following is true?
The LM curve is vertical if there is no speculative demand for money.
b.
The LM curve is horizontal if there is no speculative demand for money.
c.
The changes in money supply will have no effect on the LM curve, if the LM curve is
positively sloped.
d.
The changes in money supply will have no effects on the LM curve, if the LM curve is
negatively sloped.
e.
.IS
BN
:8
1-
31
4-
02
27
-4
a.
ed
104. The basic difference between IS and LM curve is that

IS curve explains money market and LM curve explains goods market
b.
IS curve explains goods market and LM curve explains money market
c.
IS curve explains money in circulation and LM curve explains goods in demand
d.
IS curve explains monetary policy and LM curve explains fiscal policy
e.
IS curve slopes from right to left and LM from left to right.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ty
105. The LM schedule is a
Schedule of goods market equilibrium where the supply of goods equals the demand for
goods
b.
Schedule of monetary equilibrium where the supply of money equals the demand for
money
Schedule of goods market equilibrium where the supply of goods equals the goods
produced
d.
Schedule of goods market equilibrium where the supply of goods equals the external
demand for goods
e.
Both (a) and (d) above.
20
04
Th
e
c.
Ic
fa
iU
ni
ve
rs
i
a.
106. When IS curve shifts rightwards

a.
Income will fall but interest rates will rise
b.
Income will rise but interest rates will fall
c.
Both income and interest rates will fall
d.
Both income and interest rates will rise
e.
Income will decrease but interest rate will remain unchanged.
107. A shift in the IS curve would occur if there is a change in

26
Part I
a.
Autonomous government expenditure on goods and services
b.
Transfer payments made by the government
c.
d.
e.
108. The slope of the LM curve is dependent upon the

Money supply in the economy
b.
Price level in the economy
c.
Transactions demand function for money of the economy
d.
Money supply and price level in the economy
e.
Money supply, price level and transactions demand function for money of the economy.
04
20
04
04
a.
b.
LM curve becomes horizontal
c.
IS curve becomes vertical
d.
IS curve becomes horizontal
e.
ef
.N
LM curve becomes vertical
02
27
-4
a.
o.
M
AC
109. If investment demand is infinitely interest elastic
Aggregate demand to the left
c.
Aggregate supply to the right
d.
Aggregate supply to the left
e.
None of the above.
31
b.
1-
Aggregate demand to the right
re
se
rv
ed
.IS
BN
:8
a.
4-
110. An expansionary monetary and fiscal policy shifts
ht
111. The demand for money is
Positively related to the income level and the rate of interest
b.
Negatively related to the income level and the rate of interest
c.
Negatively related to the income level and positively related to the rate of interest
d.
Positively related to the income level and negatively related to the rate of interest
e.
None of the above.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
20
04
An increase in the quantity of money demanded and an increase in the rate of interest
Ic
Th
e
a.
fa
iU
ni
112. Suppose the money supply and price level are constant, and the demand for money is a
function of income and the rate of interest. When the income level increases, there is
b.
An increase in the quantity of money demanded and a decrease in the rate of interest
c.
A decrease in the quantity of money demanded and a decrease in the rate of interest
d.
A decrease in the quantity of money demanded and an increase in the rate of interest
e.
None of the above.
113. Simultaneous equilibrium in the money (LM) and goods (IS) markets exists
a.
At an unlimited number of income levels and rates of interest
b.
At only one income level and rate of interest
c.
At an unlimited number of income levels and only one rate of interest
d.
At only one income level and an unlimited number of rates of interest
e.
None of the above.
114. A liquidity effect occurs when

27
Macroeconomics
a.
A reduction in government spending lowers the rate of interest
b.
A money supply increase lowers the rate of interest
c.
An increase in government spending increases the rate of interest
d.
A money supply increase raises the rate of interest
e.
None of the above.
115. A liquidity effect will normally result in an income effect because

Lower interest rates will increase the portfolio demand for money
b.
Lower interest rates will cause less crowding out
c.
Lower interest rates will increase interest sensitive spending
d.
Lower interest rates will cause more crowding out
e.
None of the above.
M
AC
116. A change in the money supply has a greater effect upon equilibrium income if
04
20
04
04
a.
The private sector spending is more interest-sensitive
b.
The private sector spending is less interest-sensitive
c.
The expenditure multiplier is smaller than anticipated
d.
The interest-sensitive money holding to the rate of interest is more
e.
None of the above.
02
27
-4
ef
.N
o.
a.
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31
4-
117. In which of the following situations will an increase in the money supply have no effect upon
equilibrium income?
LM is steeply sloped and IS is relatively flat.
b.
LM is vertical and IS is steeply sloped.
c.
LM is steeply sloped and IS is vertical.
d.
LM is relatively flat as is IS.
e.
None of the above.
ht
re
se
rv
ed
.IS
BN
a.
lr
ig
118. Crowding out is more likely to occur when

The demand for money is interest-sensitive, and private sector spending is largely
interest-insensitive
b.
The demand for money is interest-sensitive, and private sector spending is

interest-sensitive
c.
The demand for money is interest-insensitive, and private sector spending is

interest-insensitive
d.
The demand for money is interest-insensitive, and private sector spending is

interest-sensitive
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
e.
None of the above.
119. Crowding out will occur when

a.
A decrease in the money supply raises interest rates which crowd out interest-sensitive
private sector spending
b.
An increase in taxes of the private sector reduces private sector disposable income and
spending
c.
A reduction in income taxes causes higher interest rates, which crowd out
interest-sensitive private sector spending
d.
A reduction in government spending causes induced consumption spending to fall
e.
None of the above.

28
Part I
a.
When the relative increase in the price level is greater than the relative increase in the
nominal money supply, the real money supply decreases.
b.
When the relative increase in the nominal money supply is greater than the relative
increase in the price level, the real money supply increases.
c.
When the price level decreases, ceteris paribus, the real money supply decreases.
d.
When the price level increases, ceteris paribus, the real money supply decreases.
e.
None of the above.
Reduces the real money supply and shifts the LM schedule to the right
b.
Reduces the real money supply and shifts the LM schedule to the left
c.
Increases the real money supply and shifts the LM schedule to the right
d.
Increases the real money supply and shifts the LM schedule to the left
e.
None of the above.
o.
M
AC
04
20
04
a.
04
121. An increase in the price level
ef
.N
122. If real and nominal interest rates fall, then

Investment spending should fall, as well
b.
Investment spending should rise
c.
Consumption expenditure should fall as people save more
d.
The marginal propensity to save should rise, shifting the entire consumption schedule
e.
Investment spending should rise primarily to take up the slack left by lower
consumption expenditure.
BN
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02
27
-4
a.
b.
Gm = a.Gy Gp
c.
Gm = a.Gp Gy
d.
Gm = Gy + a. Gp
e.
Gm = a.Gy + Gp.
re
Gm = Gp a. Gy
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
se
rv
ed
.IS
123. Given, growth rate of real output = Gy, income elasticity of demand is (alpha), acceptable
rate of inflation is Gp, the money stock growth target (Gm) is given by (all in percentage
terms)
124. When economists are concerned about the liquidity preference function, they are interested in
The relationship of the demand for money and the rate of interest
b.
The proportion of liquid (cash) reserves maintained by commercial banks
20
04
iU
fa
Ic
Th
e
c.
ni
a.
The preference for a currency backed by gold
d.
A banks desire for accounts receivables as collateral
e.
The amount of money in circulation.
125. Transmission mechanism shows

a.
The interrelationship between the money market and the goods market
b.
Low increase in government expenditure increases income
c.
The relationship between income and consumption
d.
The relationship between income and saving
e.
None of the above.

29
Macroeconomics
The elasticity of demand is the same at all points on a linear demand curve.
ii.
Interest rates are inversely related to investment expenditure.
iii.
An increase in money supply tends to increase interest rates.
a.
(i) only.
b.
(ii) only.
c.
(iii) only.
d.
(i) and (ii) only.
e.
(ii) and (iii) only.
04
i.
20
04
127. A supply shock such as failure of monsoon or increase in the price of oil
Causes a rightward shift of the aggregate supply curve and thus results in higher
equilibrium output and lower prices
b.
Causes a rightward shift of the aggregate supply curve and thus results in higher
equilibrium output and higher prices
c.
Causes a leftward shift of the aggregate supply curve and thus results in lower
equilibrium output and higher prices
d.
Causes a leftward shift of the aggregate supply curve and thus results in lower
equilibrium output and lower prices
e.
Causes a rightward shift of the aggregate supply curve and thus results in lower output
and higher prices.
31
4-
02
27
-4
ef
.N
o.
M
AC
04
a.
b.
Slope of the I-S curve will increase.
c.
I-S curve will shift to the right.
d.
Slope of the I-S curve will decrease.
e.
I-S curve will not be affected.
.IS
I-S curve will shift to the left.
ig
ht
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se
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ed
a.
BN
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1-
128. If transfer payments are increased, which of the following is true of I-S curve?
s.
Al
lr
129. If the demand for money is infinitely interest elastic, which of the following is true?
Changes in money stock are totally ineffective in influencing equilibrium output and
interest rate.
b.
Changes in autonomous expenditure are totally ineffective in influencing equilibrium

output and interest rate.
c.
Changes in money stock lead to changes in equilibrium rate of interest only while
equilibrium output remains unaffected.
Changes in autonomous expenditure affects only the equilibrium output while
equilibrium rate of interest remains unchanged.
20
04
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
e.
Changes in money stock lead to changes in both equilibrium output and rate of interest
while changes in autonomous expenditure affect only the interest rate.
130. Which of the following is not true with respect to IS curve?

a.
It shows the equilibrium in the goods market.
b.
It is positively sloped.
c.
If autonomous exports increase, it will shift to the right.
d.
If government expenditure decreases, it shifts to the left.
e.
It is vertical if the consumption and investment expenditures are not responsive to the
rate of interest.
131. The term crowding out refers to the process by which

30
Part I
a.
Excessive investment is undertaken in the economy
b.
A rise in base money leads to a very tight monetary policy
c.
Increase in government deficit, due to a tax cut or an increase in government spending

reduces the funds available to investment spending
d.
Funds available for investment spending will be protected by all means
e.
b.
Varies positively with income and inversely with rate of interest
c.
Varies inversely with income and positively with rate of interest
d.
Varies inversely with income and rate of interest
e.
Does not depend on income and rate of interest.
04
Varies positively with income and rate of interest
04
20
a.
04
132. Transaction demand for money
20
04
Th
e
Ic
fa
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ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
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31
4-
02
27
-4
ef
.N
o.
M
AC
133. In an IS curve, as interest rate i increases

a. Both consumption and investment decline
b. Both consumption and investment increase
c. Consumption increases, investment declines
d. Consumption declines, investment increases
e. Consumption and investment are unaffected.
134. Which of the following statements is correct?
a. GDP deflator = Real GDP/Nominal GDP.
b. Real rate of interest = Nominal rate of interest + Rate of inflation.
c. An increase in government expenditure is likely to cause a reduction in private
investment.
d. If the interest elasticity of demand for money is zero, the IS curve becomes vertical.
e. When the rate of interest increases, the IS curve shifts to the left.
135. In the IS-LM framework, an increase in autonomous government expenditure
a. Will result in an increase in income and decrease in interest rate
b. Will result in a decrease in income and increase in interest rate
c. Will result in an increase in both income and interest rates
d. Will result in a decrease in both income and interest rates
e. Will affect neither the income nor the interest rate.
136. If interest elasticity of demand for investment and consumption is zero
a. Equilibrium income depends solely on the position of L-M curve
b. Equilibrium income is determined solely in the goods market
c.
Equilibrium income is determined by the positions of both the I-S and L-M curves
d.
Equilibrium income is unaffected by the positions of both the I-S and L-M curves
e.
Fiscal policy is totally ineffective in changing any of the real variables.
137. Japanese economy is facing the problem of liquidity trap. Which of the following statements
is not true about liquidity trap?
a.
Public is willing to hold whatever money is supplied at the current interest rate.
b.
LM curve is horizontal.
c.
Fiscal policy is more effective in increasing income.
d.
Monetary policy is ineffective in affecting interest rate.
e.
LM curve is vertical.
138. Which of the following better explains the inverse relationship between the interest rate and
31
Macroeconomics
the demand for money?

a.
The transaction demand for money.
b.
The speculative demand for money.
c.
The precautionary demand for money.
d.
The inflationary expectations.
e.
None of the above. The relationship between the interest rate and the demand for money
is direct, not inverse.
04
139. Which of the following statements is not true about IS-LM Model?
IS function represents the goods market equilibrium.
b.
LM function represents the money market equilibrium.
c.
Interest rate is a variable in both IS and LM functions.
d.
Goods and money markets interact to determine the equilibrium national income.
e.
IS curve is positively sloped.
o.
M
AC
04
20
04
a.
b.
IS curve shifts to the right.
c.
LM curve shifts to the left.
d.
Interest rate falls.
e.
Interest rate increases.
-4
Disposable income remains constant.
BN
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02
27
a.
ef
.N
140. In the standard IS-LM model, which of the following is true if the government raises tax rate
and the Reserve Bank of India decides to hold the money supply constant?
ed
.IS
141. The LM curve shows
A positive relationship between rate of interest and level of income
b.
A negative relationship between rate of interest and level of income
c.
A negative relationship between rate of interest and level of investment
d.
A positive relationship between rate of interest and level of investment
e.
A positive relationship between level of investment and level of income.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ty
142. An increase in government expenditure will

Shift both IS and LM curves to the right
b.
Shift both IS and LM curves to the left
c.
Not affect the position of LM curve but shift IS curve to the left
Not affect the position of IS curve but shift LM curve to the right
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
a.
Not affect the position of LM curve but shift IS curve to the right.
20
04
e.
143. The demand for money is a demand for real money balances for a given interest rate. If there
is an increase in the level of income because of increase in real money supply, which of the
following statements holds true?
32
a.
IS curve shifts to the left.
b.
LM curve shifts to the left.
c.
IS curve shifts to the right.
d.
LM curve shifts to the right.
e.
Both IS and LM curves shifts to the right.
Part I
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
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02
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-4
ef
.N
o.
M
AC
04
20
04
04
144. Due to an increase in the real stock of money ___.

a. The LM curve and AD curve shift towards right
b. The LM curve shifts towards left and AD curve towards right
c. The AD curve and LM curve shift towards left
d. The AD curve shifts towards left and LM curve shifts towards right
e. Increase in the real stock of money will not have any effect on LM curve but shifts AD
curve towards right.
145. Due to fiscal expansion __________.
a. IS and AD curves shift towards right
b. IS and AD curves shift towards left
c. LM and AD curves shift towards right
d. LM and AD curves shift towards left
e. Fiscal expansion will not have any effect on LM, IS and AD curves.
146. The real stock of money in the economy increases due to
a. Increase in prices
b. Decrease in prices
c. Increase in interest rates
d. Decrease in interest rates
e. Both (b) and (d) above.
147. When price level increases
a. LM curve shifts towards right
b. IS curve shifts towards left
c. Aggregate supply curve shifts towards right
d. IS curve shifts towards right
e. LM curve shifts towards left.
148. If all the resources available are fully employed then aggregate supply curve in the long run
will become
a. Horizontal
b. Vertical
c. Parabola
d. Straight line with a positive slope of 45 degrees
e. Straight line with a negative slope of 45 degrees.
149. Which of the following factor/s is/are responsible for a change in aggregate demand?
a. Rate of interest.
b. Exchange rate.
c. Government policy.
d. Both (b) and (c) above.
150. Which of the following factors is/are responsible for a change in aggregate supply?
a. Change in cost of production.
b. Supply shock.
c. Human capital.
d. Both (a) and (b) above.
33
Macroeconomics
151. An increase in the real wage will increase the quantity of labor supplied, but will reduce the
quantity of
a.
Goods supplied
b.
Labor demanded
c.
Goods demanded
d.
Goods manufactured
e.

Nominal income and nominal interest rate
b.
Real income and real interest rate
c.
Real income and nominal interest rate
d.
Nominal income and real interest rate
e.
High-powered money and interest rate.
M
AC
04
20
04
a.
04
152. In the demand function for money, we include
ef
.N
o.
153. Business firms will produce at maximum efficiency because

Of the market forces of both supply and demand
b.
Of government regulatory role
c.
They assess the basic questions of how the society allocates scarce resources
d.
Of possible change in prices of goods and services
e.
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1-
31
4-
02
27
-4
a.
.IS
BN
154. A rightward shift of aggregate demand, with no change in the aggregate supply schedule,
results in an increase in
Real output and no change in the price level when aggregate supply is upward sloping
b.
Real output and no change in the price level when aggregate supply is horizontal
c.
The price level and no change in real output when aggregate supply is upward sloping
d.
The price level and no change in real output when aggregate supply is horizontal
e.
None of the above.
Pr
es
s.
Al
lr
ig
ht
re
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rv
ed
a.
155. Aggregate demand is
Negatively related to the price level because a decline in the price level has a negative
effect on the demand for output
b.
Negatively related to the price level because a decline in the price level has a positive
20
04
Positively related to the price level because a decline in the price level has a negative
Ic
Th
e
c.
fa
iU
ni
ve
rs
i
ty
a.
d.
Positively related to the price level because a decline in the price level has a positive
e.
None of the above.
156. The slope of aggregate demand becomes flatter
34
a.
The more sensitive the investment spending is to the rate of interest
b.
The more sensitive the demand for money is to the rate of interest
c.
The smaller the value of the expenditure multiplier
d.
The large the nominal money supply
e.
None of the above.
Part I
157. A neoclassical aggregate supply schedule exists

a.
At an output rate greater than the natural rate of unemployment
b.
At an output level determined by the supply of and demand for labor
c.
When the demand for labor and supply of labor schedules adjust immediately to a
change in the price level
d.
When equilibrium in the labor markets is unaffected by shifts in the supply of labor
schedule
e.
None of the above.

Increases the price level and real output
b.
Increases the price level but has no effect on real output
c.
Increases real output but has no effect on the price level
d.
Has no effect on the price level or real output
e.
None of the above.
ef
.N
o.
M
AC
04
20
04
a.
04
158. Suppose there is full employment and aggregate supply is vertical. A decrease in taxes
-4
159. Suppose there is full employment and a vertical aggregate supply schedule. An increase in
the nominal money supply
Causes the real money supply to increase, which changes the composition of output
b.
Has no effect on the real money supply or the composition of output
c.
Causes a proportional increase in real output
d.
Reduces the rate of interest and changes the composition of output
e.
None of the above.
.IS
BN
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1-
31
4-
02
27
a.
se
rv
ed
160. When aggregate supply is positively sloped and there is an increase in the real per unit cost of
materials, aggregate supply shifts to the
Right, the price level falls, and real output increases
b.
Left, the price level falls, and real output increases
c.
Right, the price level increases, and real output decreases
d.
Left, the price level increases, and real output decreases
e.
None of the above.
Pr
es
s.
Al
lr
ig
ht
re
a.
ve
rs
i
ty
161. When aggregate supply is positively sloped and there is a decrease in the mark-up on variable
cost, aggregate supply shifts to the
Left, the price level falls, and real output increases
b.
Right, the price level falls, and real output increases
20
04
iU
fa
Ic
Th
e
c.
ni
a.
Left, the price level increases, the real output decreases
d.
Right, the price level increases, and real output decreases
e.
None of the above.
162. The economy is in inflationary equilibrium. A reduction in

a.
Government spending permanently lowers the economys rate of inflation
b.
Nominal money supply growth lowers the inflation rate with no effect on output in the
short run
c.
Nominal money supply growth lowers the inflation rate and the level of output in the
short run
d.
Government spending lowers the rate of inflation with no effect on output in the short
run
e.
None of the above.

35
Macroeconomics
163. With an upward sloping aggregate supply curve in the short run, an increase in aggregate
demand can be expected to cause
a.
Price level to increase
b.
Price level to fall
c.
Output to increase
d.
Price level and output to increase
e.
Price level to fall even as output increases.
164. An economys capital stock must decline if

Consumption exceeds investment
b.
Net investment is zero
c.
Depreciation is greater than net investment
d.
Depreciation is greater than gross investment
e.
Government expenditures on goods and services are greater than tax collections.
M
AC
04
20
04
04
a.
ef
.N
o.
165. Suppose the price elasticity of demand coefficients are given as 1.50, 0.50, 2.00 and 0.75 for
demand schedules D1, D2, D3 and D4 respectively. A one percent increase in the price leads
to an increase in total revenue for
D1 and D4 only
b.
D1, D2 and D4 only
02
27
-4
a.
D4 only
d.
D2 only
e.
D2 and D4 only.
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1-
31
4-
c.
BN
166. Internal balance refers to

Equilibrium in balance of payments
b.
Balanced budget of government
c.
Domestic savings being equal to domestic investment
d.
Full employment level of output
e.
Aggregate demand being equal to aggregate supply.
lr
ig
ht
re
se
rv
ed
.IS
a.
s.
Al
167. With respect to Aggregate Supply (AS), which of the following is true?
AS in the short run is positively sloped and in the long run it is vertical.
b.
AS is positively sloped both in the short run and in the long run.
ve
rs
i
ty
Pr
es
a.
20
04
Th
e
Ic
fa
iU
ni
c. AS is positively sloped in the short run and negatively sloped in the long run.
d. AS is vertical both in the short run and in the long run.
e. Costs have greater impact on AS in short run than in the long run.
168. Aggregate demand in an economy increases with the
a. Decrease in income of foreigners
b. Increase in the private transfers from abroad
c. Decrease in government spending
d. Increase in interest rates
e. Increase in tax rates.
169. Which of the following is likely to happen, when realized output exceeds spending?
a. Lower demand increases the unemployment.
b. Higher inflation further reduces the aggregate demand.
c. Economy attains full employment level.
d. Inventory level in the economy increases.
e.
36
Part I
170. Which of the following statements is not true in the long run?
a.
Output converges towards natural rate of output.
b.
Output becomes insensitive to changes in aggregate demand.
c.
Input costs play a greater role in the determination of equilibrium output.
d.
Aggregate supply curve is vertical.
e.
Unanticipated price changes would have adverse impact on output.
171. Aggregate supply curve becomes vertical even in short run, if

The economy is facing deficit demand
b.
There are idle resources
c.
All available resources are fully employed
d.
The economy is yet to reach full employment
e.
All firms are earnings normal profits.
M
AC
04
20
04
04
a.
ef
.N
o.
02
27
-4
172. In an economy M1 is equal to currency with public + Demand deposits with banks + Demand
portion of savings deposits with Banks + Other Deposits with RBI, where currency with
public is equal to
Currency in circulation less currency with commercial banks
b.
Notes and coins in circulation and cash with banks
c.
Notes and coins in circulation and demand deposits with banks
d.
Demand deposits with banks, other deposits and small coins in circulation
e.
Notes and coins in circulation and saving deposits.
se
rv
ed
.IS
BN
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1-
31
4-
a.
re
173. In an economy currency deposit ratio (Cu) and high-powered money (h) are constant. The
increase in the reserve ratio will ___________.
Increase the money supply
b.
Decrease the money supply
c.
Not change the money supply
d.
Decrease money supply in proportion to the increase in reserve ratio
e.
Decrease money supply lesser in proportion to the increase in reserve ratio.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
iU
ni
174. The basic difference between money stock measure M3 and M4 is that
M3 is more than M4
Ic
fa
a.
M2 is part of M3 whereas M2 is not part of M4
c.
M3 is part of M1 and M4 is not part of M1
d.
M4 includes all post office deposits, where as in M3 these are not included
e.
M1 is part of M4 where as M1 is not part of M3.
20
04
Th
e
b.
175. Time deposits with banks are included in __________ measure of money stock.
a.
M1
b.
M2
c.
M3
d.
M4
e.

37
Macroeconomics
176. Bank rate is

a.
The rate at which Central Bank discounts the government bills
b.
The rate at which Central Bank discounts the eligible bills of commercial banks
c.
The rate at which commercial banks give loans to the other commercial banks
d.
The rate at which commercial banks lend to the public
e.
The rate at which Central Bank discounts the foreign bills.
Increasing the volume of reserves.
iii.
Decreasing the volume of reserves.
iv.
Increasing reserve requirements.
a.
Only (iii) above
04
ii.
20
Lowering reserve requirements.
M
AC
04
i.
04
177. The RBI can increase the demand deposit component of the money supply by
Only (iv) above

d.
e.
Both (ii) and (iv) above.
-4
ef
.N
o.
b.
c.
4-
02
27
178. The quantity of notes and coins in private circulation plus the quantity of cash held by the
banking system is called
Monetary base
b.
Stock of high-powered money
c.
M1
BN
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1-
31
a.
20
04
Th
e
Ic
fa
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ni
ve
rs
i
ty
Pr
es
s.
Al
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ed
.IS
d. M3
e. Both (a) and (b) above.
179. If you withdraw Rs.100 from your checking account, this transaction
a. Increases the supply of money
b. Decreases the supply of money
c. Does not change the supply of money
d. Increases the supply of money by more than 100
e. Decreases the supply of money by less than 100.
180. Read the following statements and choose the best alternatives.
i.
When you deposit currency in a commercial bank cash goes out of circulation and the
money supply declines.
ii. If the RBI creates more money, Indians would achieve a higher standard of living.
a. (i) and (ii) are true
b. (i) and (ii) are false
c. (i) is true and (ii) is false
d. (i) is false and (ii) is true
e. (i) is always true and (ii) is sometimes true.
181. In an economy Cu is equal to currency deposit ratio and r is equal to reserve ratio, then the
money multiplier in the economy is equal to
a. (1 + Cu)/(r Cu)
38
b.
(1 + Cu)/r
c.
d.
e.
(1 + Cu)/(1 r + Cu)
(1 + Cu)/(r + Cu)
(1 Cu)/(r + Cu).
Part I
182. In an economy high-powered money is equal to

a.
Monetary liabilities of Central Bank + Government money
b.
Monetary liabilities of Central Bank Government money
c.
Financial assets + Non-monetary liabilities
d.
Monetary liabilities of Central Bank + Foreign exchange assets
e.
183. If reserve ratio is constant and currency deposit ratio increases then money multiplier
Increases
b.
Decreases
c.
Does not change
d.
Decreases more than proportionately to the increase of currency deposit ratio
e.
Decreases less than proportionately to the increase of currency deposit ratio.
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184. Financial interrelation ratio is equal to

Total issues/National income
b.
Primary issues/Net capital formation
c.
Total issues/Net capital formation d.
d.
Total stock of financial assets/Stock of fiscal assets
e.
Secondary issues/Net capital formation.
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M1 is high-powered money.
b.
M2 is high-powered money.
c.
M3 is high-powered money when time deposits with bank are not taken.
d.
M4 is high-powered money when total postal deposits are not taken.
e.
None of the above.
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186. Which of the following statement/s is/are true?

M1 = Currency with public + Demand portion of savings deposits with banks +
Demand deposits with banks + Other deposits with RBI.
ii.
M2 = M1 + Post office savings deposits.
iii.
M3 = M1 + Time deposits with banks.
iv.
M4 = M3 + All post office deposits.
a.
Only (i) above.
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i.
c.
d.
Both (i) and (iv) above.
e.
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187. If currency deposit ratio is constant and reserve ratio increases then money multiplier
a.
Increases
b.
Decreases
c.
Does not change
d.
Decreases more than proportionately to the increase of reserve ratio
e.
Decreases less than proportionately to the increase of reserve ratio.

39
Macroeconomics
188. Saving deposits are not a part of money stock measure (M1) because
a.
They are not recognized as legal tender by the RBI
b.
They are negligible compared to demand deposits
c.
They are not a medium of exchange
d.
They will not generate money supply
e.
189. An increase in volume of investment will not occur if interest rates

Remain constant while the government announces new tax concessions on capital
additions
b.
Are lowered by increasing M3
c.
Remain constant while corporate income tax is increased
d.
Remain constant, while corporate sector exports increase as result of a decrease in

personal income tax
e.
None of the above.
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190. Financial Interrelations ratio is
The ratio of total financial claims issued during a year to the national income for the
year
b.
The ratio of primary issues by the non-financial sector to total physical asset formation
c.
The ratio of volume of financial instruments issued by financial intermediaries during a

period to the volume of primary issues by the non-financial sector
d.
The ratio of the total stock of financial assets at a point of time to the stock of physical
assets
e.
Ratio of total financial claims to total physical asset formation.
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191. The link between changes in the money supply and changes in real macroeconomic variables
is best described by
A change in interest rates that induces a change in spending, a change in aggregate
demand, and thus a potential change in real GDP
b.
A change in interest rates that induces a change in spending, a change in aggregate

demand, and thus an immediate and unavoidable change in real GDP
c.
A change in spending caused directly by the Central Banks adjusting its own
investment portfolio and which translates into a change in aggregate demand and finally
a change in nominal GDP
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a.
d.
A change in bankers interest rates by direct intervention that may or may not alter real
GDP by altering spending
e.
None of the above.
192. New issues ratio is defined as
40
a.
Stock of financial assets/stock of physical assets
b.
Primary issues by non-financial sector/total physical asset formation
c.
Volume of financial instruments issued by financial intermediaries/volume of primary

issues by non-financial sectors
d.
Total financial claims issued during a year/National income for the year
e.
None of the above.
Part I
193. Commercial banks create money through credit creation. Which of the following statements
is true with regard to credit creation?
a.
Credit creation by commercial banks is limited by CRR .
b.
Commercial banks can create as much credit as they want.
c.
RBI has no control over the credit created by Commercial banks.
d.
CRR has no impact on credit creation.
e.
None of the above
04
194. Which of the following does not affect the balance sheet of Reserve Bank of India?
Central 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.
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195. Which of the following ratios is not an indicator of financial development of a country?
Finance Ratio.
b.
Financial Interrelations Ratio.
c.
New Issue Ratio.
d.
Intermediation Ratio.
e.
Cost Benefit Ratio.
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196. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
Monetary liabilities of the RBI increases .
b.
High-powered money in the economy decreases.
c.
The value of money multiplier decreases .
d.
Aggregate demand in the economy increases.
e.
Price level in the economy increases.
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197. The difference between M3 and M1 is

Demand deposits
b.
Post office savings deposits
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a.
c.
Savings deposits
d.
Time deposits
e.
M2.
198. Other things being equal, an increase in the supply of money

a.
Lowers both nominal interest rate and aggregate demand
b.
Raises both nominal interest rate and aggregate demand
c.
Raises nominal interest rate and lowers aggregate demand
d.
Lowers nominal interest rate and raises aggregate demand
e.
Does not change either nominal interest rate or aggregate demand.

41
Macroeconomics
Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium

in the Classical Model
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199. In the classical model, if production function is represented by Y = f(N), where the capital
stock is assumed to be constant, then output in the short run depends only on
a. Raw material available
b. Labor input
c. Demand for goods
d. Production capacity
e. Wages.
200. The demand for labor is derived from the
a. Quantity of goods produced by labor
b. Price of goods produced by labor
c. Incremental cost and incremental revenue generated by the employment of labor
d. Incremental cost generated by the employment of labor
e. Incremental revenue generated by the employment of labor.
201. Under pure competition a profit maximizing firm hires workers until the real wage is equal to
the
a. General price level
b. General price level multiplied by marginal product of labor
c. General price level divided by marginal product of labor
d. Marginal product of labor divided by general price level
e. Marginal product of labor.
202. An increase in real wages will
a. Shift the demand for labor schedule to the right
b. Shift the demand for labor schedule to the left
c. Increase the quantity of labor demanded
d. Decrease the quantity of labor demanded
203. Marginal product of labor is the
a. Change in supply per unit change in the labor employed
b. Change in demand per unit change in the labor employed
c. Change in labor cost per unit change in the labor employed
d. Change in income per unit change in the labor employed
e. Change in output per unit change in the labor employed.
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204. Which of the following is not a postulate of Says law?

a.
Disequilibrium in the economy can exist for a while.
b.
There might be temporary mismatch between aggregate demand and supply.
c.
In the short run there can be excess production and unemployment.
d.
Prices and wages are sticky downwards.
e.
Interest rate fluctuations bring about saving and investment equilibrium.
205. In the classical model, the long run effect of an increase in government spending is
42
a.
An increase in the price level
b.
An upward shift of the aggregate demand curve
c.
An increase in the level of output
d.
e.
(a), (b) and (c) above.
Part I
Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium

in the Keynesian Model
206. In the Keynesian model, workers
Accept a decrease in money wages as long as these cuts bring about full employment
b.
Accept cuts in money wages as long as real wages do not fall
c.
Resist any decrease in their real wages
d.
Resist any decrease in their money wages
04

The basic difference between Classical model and the Keynesian model lies in the assumption of
a. Rigid money wages
b. Rigid money supply
c. Demand for money
d. Labor supply
e. Real interest rate.
In the Keynesian model, an economy consists of
a. Labor market, money market
b. Labor market, goods market
c. Money market, goods market
d. Labor market, international trade
e. Labor market, money market, goods market.
Says law of market emphasizes that
a. Demand for goods creates its own supply
b. Demand for goods depends on supply of money
c. Supply of goods creates its own demand
d. Supply of goods depends on supply of money
In the Keynesian model, macroeconomic equilibrium can take place at
a. Full employment
b. Less than full employment
c. Less than full capacity output
d. Both (a) and (c) above
If price level falls, then real wages
a. Decrease in proportion to decrease in prices
b. Decrease but not in proportion to decrease in prices
c. Increase
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211.
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210.
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o.
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207.
a.
d.
Decrease more than proportionately to decrease in price
e.
None of the above.
212. If real wages increase, then unemployment

a.
Decreases in proportion of labor demand
b.
Decreases in proportion to supply of labor
c.
Decreases more than the proportion of labor demand
d.
Increases
e.
Remain at the same level.

43
Macroeconomics

a.
If prices increase then real wages increase.
b.
If real wages increase then unemployment increases.
c.
If prices increase then unemployment decreases, nominal wages remaining constant.
d.
e.
b.
Demand depends on supply of money
c.
Supply creates its own demand
d.
Supply depends on demand for money
e.
20
Demand creates its own supply
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214. Keynesian model of macroeconomic equilibrium emphasizes that
215. Investors prefer holding money to bonds if they expect

Interest rates to increase
b.
Interest rates to decrease
c.
Capital loss from a bond
d.
Reinvestment rate of return exceeds capital loss from a bond
e.
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216. According to the Keynesian Aggregate Supply Model

Aggregate supply varies positively with price level
b.
Aggregate supply is independent of price level
c.
Involuntary unemployment cannot exist
d.
Nominal and real wage are perfectly flexible
e.
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s.
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217. Which of the following is/are true in case of an economy in equilibrium?

Aggregate demand is equal to aggregate supply.
b.
Employment is not necessarily at full employment level.
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Unintended investments are zero.
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ni
a.
d.
e.
218. The term speculative demand for money refers to money balances held in expectation of
44
a.
Fall in the prices of goods
b.
Fall in the prices of bonds
c.
An increase in the interest rates
d.
e.
Part I
219. Which of the following is true?

The classical model assumes a fixed nominal wage and Keynesian model assumes a
fixed real wage.
b.
The classical model assumes a fixed real wage and Keynesian model assumes a fixed
real wage.
c.
The classical model assumes instantaneous adjustment of real wage in response to

demand-supply balance in the labor market while the Keynesian model assumes fixed
nominal wage.
d.
The classical model assumes fixed nominal wage but Keynesian model assumes
instantaneous adjustment of real wages in response to demand supply balance in labor
market.
e.
Both the classical and Keynesian models assume a fixed real wage.
04
20
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a.
220. Which of the following is not true?

Classical model of income determination assumes wage flexibility.
b.
Keynesian model of income determination assumes wage rigidity.
c.
Classical economists consider only transaction demand for money.
d.
Keynes considers speculative demand for money also.
e.
Keynesian model of income determination results in a vertical aggregate supply curve at

the full employment level of output.
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221. An increase in the autonomous government expenditure will result in

Higher level of income and lower rate of interest
b.
Higher level of income and higher rate of interest
c.
Lower level of income and lower rate of interest
d.
Lower level of income and higher rate of interest
e.
None of the above.
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222. According to Keynes, the actual expenditure in an economy can differ from the planned
expenditure. Which of the following is true if the actual expenditure is less than the planned
expenditure in the economy?
There will be positive fixed investment in the economy.
b.
There will be negative fixed investment in the economy.
c.
There will be positive inventory investment in the economy.
d.
There will be negative inventory investment in the economy.
e.
There will be no change in inventory investment in the economy.
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223. Which of the following is not one of the basic Postulates of the Keynesian Model?
Full employment occurs only by coincidence is an economy.
b.
Effective demand determines the level of employment and output.
c.
Since full employment is not always possible, Government intervention is essential.
d.
Budget deficit is a tool to fight recession.
e.
Monetary policy is more effective than fiscal policy.
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a.
224. The unemployment in the Keynesian model is caused by

a.
Demand deficiency
b.
Supply deficiency
c.
Demand sufficiency
d.
Supply sufficiency

45
Macroeconomics

225. According to monetarism, demand for money depends on
a.
Interest rate on bonds
b.
Inflation rate
c.
Rate of return on all assets other than money
d.
Money supply
e.
Cost of living.
04
04
226. According to monetarism, in the short run, increase in money supply results in
Decrease in output
b.
Increase in output
c.
Decrease in price level
d.
Increase in price level
e.
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227. Which of the following is/are the implications of rational expectation hypothesis?
Econometric models are not very useful in evaluating alternative economic policies.
ii.
There is no trade-off between inflation and unemployment.
iii.
Discretionary monetary and fiscal policies cannot be used to stabilize the economy.
a.
Only (i) above.
b.
Only (iii) above.
c.
Both (i) and (iii) above.
d.
e.
All of (i), (ii) and (iii) above.
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228. Basic assumption/s of rational expectation theory is/are

Guesses about the future are on average correct
b.
Guesses about the future are always correct
c.
Information received will be always correct
d.
e.
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229. To improve market efficiency, which of the following is not recommended by Supply side
economics?
Reduce government controls.
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a.
Promote competition.
c.
Restrict the power of trade unions.
d.
Remove institutional barriers.
e.
Increase corporate tax rate.
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b.
230. According to the Laffer curve, as the tax rate increases, tax revenues
46
a.
Rise continuously
b.
Decrease continuously
c.
Initially decrease and then increase
d.
Initially increase and then decrease
e.
Remain constant.
Part I
231. The Chief Economist to the Government told the Cabinet that the government can no longer
fool the people by increasing its spending during election years, as people will anticipate this
kind of behavior as previous governments used to do so. The economist is an advocate of
a.
Classical economics
b.
Rational expectations
c.
Keynesian economics
d.
Supply-side economics
e.
Monetarism.
04
232. Monetarists prefer monetary policy over the fiscal policy because they feel that
Statistically money demand function can be better determined than consumption or

investment demand
b.
Money is a substitute for financial assets
c.
Demand for money is determined by rate of interest
d.
Fiscal policy is ineffective because of crowding out effect
e.
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233. According to the school of rational expectations there is no trade off between inflation and
unemployment because
People make biased forecasts about the future of the economy based on all the available
information
b.
People anticipate changes in money supply and accordingly adjust prices and wages
c.
Wages are rigid downwards
d.
Prices are rigid downwards
e.
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234. The curve that depicts the relationship between the rate of change in prices and the rate of
unemployment is
Laffer curve
b.
Phillips curve
c.
Aggregate supply curve
d.
LM curve
e.
IS curve.
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Economic Fluctuations, Unemployment and Inflation
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235. The bank reserves fall rapidly in _________ stage of business cycle.
Recovery
b.
Boom
c.
Recession
d.
Depression
e.
236. If the available workers are unaware of the jobs being offered and the employers are not
aware of the available workers, such type of unemployment is called
a.
Frictional unemployment
b.
Structural unemployment
c.
Cyclical unemployment
d.
Disguised unemployment
e.
Demand pull unemployment.

47
Macroeconomics
237. Unemployment that arises when there is a general downturn in business activity is known as
a.
b.
c.
d.
e.
238. Full employment is the level at which there is

Zero unemployment
b.
Normal rate of unemployment
c.
Least demand for labor
d.
Least supply of labor
e.
Demand for goods is less than supply.
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a.
General downturn in business activity
b.
Changes in labor market
c.
Increase in inflation
d.
Structural changes in economy
e.
Frequent changes of jobs by labor.
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239. Natural rate of unemployment increases due to
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240. If the actual rate of unemployment exceeds the natural rate of unemployment then
Actual output of the economy will fall below its potential
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a.
Production will increase more than potential
c.
Disguised unemployment increases
d.
Consumption of goods decreases
e.
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241. Unemployment that arises due to regional occupational pattern of job vacancies, which does
not match the pattern of workers availability and suitability, is known as
b.
c.
d.
e.
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242. The inventory stock will be high in _________ stage of a business cycle.
Recovery
b.
Boom
c.
Recession
d.
Depression
e.
243. Disguised unemployment means

a. Unemployment in agriculture
b. Unemployment due to recession
c. Unemployment by choice
d. Unemployment due to downturn in business activity
e. Marginal Productivity of Labor (MPL) is zero.
48
Part I
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244. In which sector of Indian economy will we find a high rate of disguised unemployment?
a. Service sector.
b. Transport sector.
c. Agriculture sector.
d. Manufacture sector.
e. Mining sector.
245. Stagflation is a period of
a. High inflation
b. Low inflation
c. High unemployment
d. Low unemployment
e. Both (a) and (c) above.
246. The real rate of interest
a. Equals the nominal rate plus the rate of inflation
b. Equals the rate of inflation minus the nominal rate
c. Equals the nominal rate minus the rate of inflation
d. Tends to increase when inflation rises
e. Is more relevant to investors than consumers.
247. Unemployment that is caused by a mismatch between the composition of the labor force (in
terms of skills, occupation, industries, or geographic location) and the make-up of the
demand for labor is called
a. Real wage unemployment
b. Deficient-demand unemployment
c. Frictional unemployment
d. Structural unemployment
e. Search unemployment.
248. During the recessionary phase of a business cycle
a. The purchasing power of money is likely to decline rapidly
b. The natural rate of unemployment will increase dramatically
c. Potential national income will exceed actual national income
d. Actual national income will exceed potential national income
e. The real rate of interest will exceed the nominal rate of interest.
249. Monetary theorists believe in the use of
a. A stable growth rate for the money supply
b. Stable interest rates to stabilize the money supply
c. Fiscal policy as the main stabilization tool
d. A stop-and-go monetary policy for fine tuning the economy
e. Input-output planning as the main stabilization tool.
250. The Philips curve shows that
a. High unemployment rates are associated with low increases in money wage rates
b. Low unemployment rates are associated with low rates of inflation
c. High unemployment rates are associated with low rates of inflation
d. High inflation rates are associated with higher level of money wage rates
e. High inflation rates are associated with small increases in money wage rates.
49
Macroeconomics
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251. Bottlenecks in the context of macroeconomics refers to

a. Inadequate spending in a sector of the economy
b. A shortage of materials in a full employment economy
c. Inadequate supply of labor in a full employment economy
d. Inadequate supply of specific resources in an economy below full employment
e. Both (b) and (c) of the above.
252. Which of the following is most likely to happen during a recession?
a. Decrease in inventory .
b. Producers will be cautiously optimistic.
c. Capacity under utilization .
d. Expansion in bank credit.
e. Increasing income levels.
253. Which of the following statements is/are true about the impact of inflation in the economy?
a. Unanticipated inflation hurts the fixed income earners most.
b. Higher than expected inflation hurts creditors but benefits debtors.
c. Inflation creates inefficiency in the economy because it forces people to search for
prices when they could be doing something else.
d. Inflation can lead to a misallocation of resources because people tend to make mistakes
when there is inflation in the economy.
254. Suppose an economy is experiencing inflation. And at the same time, there is a slowing down
of economic activities. This is a case of
a. Deflation
b. Hyper inflation
c. Recession
d. Depression
e. Stagflation.
255. Phases of business cycles in an economy are designated primarily based on the
a. Unemployment rate
b. Price levels
c. Real GDP
d. Inventory levels
e. Gross investment.
i.
High inflation.
ii. High growth of real GDP.
iii. High unemployment.
iv. High aggregate demand.
a. Both (i) and (iii) above
b. Both (iii) and (iv) above
c. (i), (ii) and (iii) above
d. (ii), (iii) and (iv) above
e. All (i), (ii), (iii) and (iv) above.
257. Full employment exists when there is
a. Zero unemployment
b. Natural rate of unemployment
c. Least demand for labor
d. Least supply of labor
e. Both (c) and (d) above.
50
Part I
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258. When a person is employed in a sector where his/her employment does not make any
difference to the output, it signifies the presence of
a. Frictional unemployment
b. Cyclical unemployment
c. Disguised unemployment
d. Structural unemployment
e. Sectoral unemployment.
259. Cost push inflation occurs when
a. Wages are decreased
b. Productivity of labor increases
c. Cost of raw material increases
d. Aggregate supply curve shifts to the right
e. New raw material reserves are found.
260. Recessionary GDP gap signifies
a. Higher potential real GDP compared to realized real GDP
b. Hyper inflationary situation
c. Deflationary situation with high unemployment
d. Existence of natural rate of unemployment
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261. Balance of trade is

a. The difference between balance on current account and capital account
b. Same as the balance of merchandize trade
c. Same as the balance of current account
d. Same as the balance of capital account
e. Overall BoP balance.
262. All entries in the balance of payments should collectively sum to
a. GDP of that country
b. GNP of that country
c. Gold reserves of that country
d. Zero
e. Exports of that country.
263. In the BoP statement, current account includes
i.
Merchandize, invisible items
ii. Government loans from abroad
iii. Foreign direct investment.
a. (i) only
b. Both (i) and (ii) above
c. Both (i) and (iii) above
d. Both (ii) and (iii) above
e. All of (i), (ii) and (iii) above.
264. The changes in foreign exchange reserves and reserves of monetary gold held by the
monetary authority will be recorded in __________ account of the BoP statement.
a. Current
b. Capital
c. Errors and omissions
d. Official reserve
51
Macroeconomics
265. The deficit on current account implies

a.
Exports of merchandize goods, invisibles is less than imports of merchandize goods,

invisibles
b.
Foreign direct investment in the country is more than exports
c.
Domestic industries are financed more by the international financial institutes than local
financial institutions
d.
Exports of merchandize goods are less than merchandize imports
e.
04
266. Dumping in international trade means
The sale of goods by foreign supplier in anothery country at price above than the price
at which the supplier sells in domestic market
b.
The sale of goods by foreign supplier in another country at price below than the price at
which the supplier sells in domestic market
c.
The sale of goods by domestic supplier in another country at price above than the price
at which the supplier sells in domestic market
d.
Distributing the goods in international markets without any consideration
e.
Giving consumer goods freely to the poor nations.
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267. The investment income from abroad appears under _________ head of BoP statement.
Current account
b.
Capital account
c.
Official reserve account
d.
Errors and omissions
e.
Unilateral transfer account.
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268. International transfers from abroad means transferring of

Goods made by the developed countries to undeveloped countries without consideration
b.
Goods from one country to another due to bilateral agreement
c.
Transfer of assets from one country to another country without consideration
d.
e.
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269. If the balance on current and capital accounts of Balance of Payments (BoP) taken together is
negative, then
It is a case of BoP surplus
It is a case of BoP where the official reserve account is in surplus
20
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e
Ic
b.
fa
a.
c.
It is a case of BoP deficit
d.
It is a case of BoP disequilibrium
e.
None of the above.
270. A current account deficit unmatched or exceeded by a capital account surplus will
52
a.
Cause contraction of money supply
b.
Cause domestic interest rate to raise
c.
Lead to a fall in government budget deficit
d.
Lead to an increase in the propensity to import
e.
Cause expansion of money supply.
Part I
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271. Transfer Payments are

a. Payments made to a factor of production
b. Payments transferred from one sector to another
c. Payments made for no return service
d. Payments made by government of one country to another
272. A decline in the foreign exchange reserves of a country, other things remaining the same will
a. Cause a capital inflow into the country
b. Cause a contraction of money supply in the country
c. Force the country to borrow from foreign countries
d. Increase the prices of imported goods
273. Which of the following transactions is included in the current account balance of the balance
of payments statement?
a. Foreign direct investments.
b. Portfolio investments.
c. External commercial borrowings.
d. Dividends earned on portfolio investments.
e. External assistance.
274. All entries in the balance of payments statement should collectively sum to
a. GDP of the country
b. GNP of the country
c. Foreign exchange reserves of the country
d. Zero
e. Exports of the country.
275. Which of the following transactions is included in the current account balance of the Balance
of payments statement?
a. Foreign direct investments.
b. Portfolio investments.
c. External commercial borrowings.
d. Dividends earned on portfolio investments.
e. External assistance.
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Debt
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276. Customs duty is an instrument of

a.
Fiscal policy
b.
Monetary policy
c.
Trade policy
d.
Revenue policy
e.
None of the above.
277. Increase in net RBI credit to the Central Government is reflected in ________ deficit.
a.
Budget
b.
Revenue
c.
Monetized
d.
Gross primary
e.
Gross fiscal.
53
Macroeconomics
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278. Which of the following items is/are the major components of non-plan expenditure?
a. Interest payments.
b. Defense expenditure.
c. Subsidies.
d. Both (a) and (b) above.
279. Gross fiscal deficit interest payments of government is equal to
a. Revenue deficit
b. Capital deficit
c. Budget deficit
d. Primary deficit
e. Monetized deficit.
280. Profits from public sector undertakings come under
a. Revenue receipts
b. Capital receipts
c. Monetized receipts
d. Both (a) and (c) above
281. Large fiscal deficit will have implications on
a. Money supply
b. Inflation
c. Private investments
d. Both (a) and (b) above
282. An increase in Statutory Liquidity Ratio (SLR) will result in
a. An increase in fiscal deficit
b. A decrease in fiscal deficit
c. No change in fiscal deficit
d. An increase in fiscal deficit proportion with an increase in SLR
e. A decrease in fiscal deficit proportion with an increase in SLR.
283. Monetized deficit is a deficit caused due to
a. Increase in net RBI credit to states
b. Increase in net government credit to states
c. Increase in net RBI credit to commercial banks
d. Increase in net government borrowings from market
e. Increase in net RBI credit to the Central Government.
284. Which of the following are the examples of external debt?
i.
Short-term loan from IMF.
ii. Bonds issued by Indian company in overseas market.
iii. Bonds issued by Central Government in international market.
iv. Investment by Non-Resident Indians in Indian companies debentures on repatriation
basis.
a. Both (i) and (ii) above.
b. Both (i) and (iii) above.
c. Both (ii) and (iii) above.
d. Only (i), (ii), and (iii) above.
e. All of (i), (ii), (iii) and (iv) above.
54
Part I
285. Budgetary deficit + Government borrowing and other liabilities is known as

a.
Revenue deficit
b.
Capital deficit
c.
Budget deficit
d.
Primary deficit
e.
Fiscal deficit.
Institute mandatory wage-price guidelines
c.
Institute voluntary wage-price guidelines
d.
e.
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b.
20
Control prices permanently
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04
286. If modern economies wish to maintain both full employment and price stability as their
policy objectives, then they should
o.
287. Primary deficit is given by

Revenue Deficit Interest Payment
b.
Budget Deficit Interest Payment
c.
Fiscal Deficit Interest Payment
d.
Total Receipts Total Expenditure
e.
Revenue Receipts Revenue Expenditure.
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An equal increase in government expenditure and taxation can result in an increase in

GDP, other things being equal.
b.
Fiscal policy, if properly administered, would eliminate the need for monetary policy.
c.
The existence of the progressive personal income tax system increases the size of the
government spending multiplier.
d.
A downward shift in the investment schedule has a greater multiplier effect on GDP
than an equivalent downward shift in the government-expenditures schedule.
e.
Autonomous investment is the part of investment that increases with national income.
s.
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289. Which of the following statements is false?

Increase in output can cause increase in investment.
b.
Increase in saving can cause increase in current output.
c.
Increase in investment can cause increase in output.
d.
Decrease in taxes can cause increase in output.
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ty
a.
Decrease in government spending can cause decrease in output.
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04

a.
Installing a progressive income tax would have no effect on the Keynesian multiplier.
b.
The open economy investment multiplier is lower than the closed economy multiplier
even when net exports are not sensitive to changes in GDP.
c.
When full employment is reached, increases in money GDP are extremely difficult to
achieve.
d.
To fulfill all of the characteristics of equilibrium, the C + I + G + X schedule must have

a slope steeper than the slope of the 45-degree line.
e.
Taxes collected by the government can lower the economys national output, while
government expenditures will tend to raise national output.
55
Macroeconomics
291. If the government increases its expenditure and simultaneously adjusts the tax rate such that
the budget deficit remains at the original level, then which of the following is true?
The equilibrium income remains unchanged.
b.
The equilibrium income increases by the amount of increase in government

expenditure.
c.
The equilibrium income will increase by the amount of increase in government

expenditure if marginal propensity to consume is greater than the investment- income
ratio in the investment function.
d.

expenditure if marginal propensity to import is equal to the investment-income ratio in
the investment function.
e.

expenditure if marginal propensity to consume is equal to the investment-income ratio
in the investment function.
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292. Given the supply of money, if the government reduces the tax rate which of the following is
true?
Equilibrium income and interest rate will increase.
b.
Equilibrium income and interest rate will decrease.
c.
Equilibrium income will decrease but interest rate will increase.
d.
Equilibrium income will increase but interest rate will remain unchanged.
e.
Equilibrium income will remain unchanged but interest rate will increase.
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293. Government borrowing to finance large deficits increases the demand for loanable funds and
Increases the supply of loanable funds
b.
Exerts downward pressure on interest rates
c.
Has no impact on interest rates
d.
Puts upward pressure on interest rates
e.
Makes it easier for businesses to borrow money.
s.
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Pr
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294. If Mr. X buys a National Small Savings Certificate, which of the following is likely to
happen?
Increase in Government market borrowings.
b.
Increase in the other liabilities of the Government .
c.
Increase in forex reserves.

Increase in Government revenue.
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a.
Decrease in Government liability.
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04
e.
295. Automatic stabilizers refer to
56
a.
Inherent mechanisms in the stock market that automatically cause stock market gains to
be cancelled out by losses, which make expected long-run returns equal to zero
b.
The invisible hand mechanisms which automatically bring the economy out of a
recession
c.
Government revenue and expenditure items that change automatically in response to

changes in economic activity
d.
Discretionary monetary policy maneuvers designed to keep inflation under control

automatically
e.
None of the above.
Part I
296. Which of the following policy measures is/are fiscal policy measure(s)?
a.
The government cuts taxes or raises spending to get the economy out of a recession.
b.
The central bank changes the money supply to affect the price level, interest rates and
exchange rates.
c.
The government restricts imports and stimulates exports .
d.
e.

Money supply in the economy will increase.
b.
Interest rate will increase.
c.
Primary deficit will increase.
d.
Public debt will increase.
e.
Revenue deficit will decrease.
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297. Which of the following is true if the Government monetizes part of its deficit?
o.
298. If a Government is running surplus in its budget, we can expect that public debt will be
Rising
b.
Falling
c.
Constant
d.
Falling if there are tax cuts
e.
Falling if the government uses the surplus to repay its past debts.
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a.
c.
Indirect tax system
d.
Value added tax system
e.
Regressive tax system.
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Progressive tax system
.IS
Proportional tax system
b.
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300. Monetized deficit refers to
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299. Personal taxes in India best illustrates a
Fiscal deficit minus interest payments
b.
Borrowings and other liabilities of the Central Government
c.
Increase in the net RBI credit to the Central Government
d.
Fiscal deficit minus Primary deficit
e.
RBIs credit to the commercial banks.
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a.
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301. In the Union Budget, profits from public sector undertakings are taken under
Revenue receipts
b.
Capital receipts
c.
Monetized receipts
d.
Planned expenditure
e.
Fiscal deficit.
302. Under which of the following tax system, more tax is imposed on the lower income groups?
a.
Progressive.
b.
Regressive.
c.
Proportional.
d.
Customs.
e.
Value Added Tax.

57
Macroeconomics
303. The variables that changes the government spending and revenue as the economy fluctuates,
without any deliberate effort of the government are called
a.
Automatic Stabilizers
b.
Lagging indicators
c.
National income aggregates
d.
Real factors
e.
Growth variables.
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304. Which of the following is true if the Central Bank reduces the Reserve Ratio?
Money supply and loans given by commercial banks will decrease.
b.
Money supply will decrease while loans given by commercial banks will increase.
c.
Money supply and loans given by commercial banks will increase.
d.
Money supply will increase while loans given by commercial banks will decrease.
e.
Money supply will remain unaffected while the loans given by the commercial banks
will decrease.
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02
305. A reduction in commercial bank reserves due to weekly increases in currency in circulation is
Reserve requirements
b.
Open-market operations
c.
Terms of consumer credit
d.
Margins on security loans
e.
Moral suasion.
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306. Loose monetary policy coupled with a contraction of aggregate supply should
Cause government spending to fall automatically
b.
Cause aggregate demand to fall
c.
Cause many commercial banks to close their doors
d.
Cause interest rates to fall in the short run
e.
Cause a dramatic upturn in both public and private investment.
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a.
Ic
Increase interest rates, the money supply, and national income
b.
Increase interest rates and the money supply, but decrease national income
c.
Increase interest rates, but decrease the money supply and national income
d.
Decrease interest rates, but increase the money supply and national income
e.
Decrease interest rates, the money supply, and national income.
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Th
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a.
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307. Open-market purchases of government bonds by Reserve Bank of India will have the
tendency to
308. In an inflationary period, the appropriate policy for the RBI would be to
58
a.
Sell government securities in the open market
b.
Encourage commercial banks to increase their loans
c.
Reduce Cash Reserve Ratio
d.
Reduce bank rate
e.
Extend credit to government.
Part I
Increasing the bank rate.
b.
Increasing the CRR.
c.
Increasing the refinance limits.
d.
Buying of government securities in the open market.
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310. If RBI wants to sterilize an inflow of foreign exchange, it should
a. Lower the bank rate
b. Lower the CRR
c. Sell government securities in the open market
d. Increase the repo rate
e. Buy government securities in the open market.
311. If gross domestic capital formation is 3500 and gross domestic savings are 3300, there is
a. An inflow of foreign savings of 200
b. An outflow of domestic savings of 200
c. A current account surplus of 200
d. A current account deficit of 200
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a.
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309. Which of the following is not a contractionary policy?
31
4-
Trade and Exchange Rate Policies
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312. Which of the following policies consists of trade policy?

i.
Export policy.
ii. Import policy.
iii. Technological policy.
iv. Industrial policy.
v. Licensing policy.
a. Both (i) and (ii) above.
Only (i), (ii) and (iii) above.
c.
Only (i), (ii) and (iv) above.
d.
Only (i), (ii) and (v) above.
e.
Only (i), (ii), (iii) and (iv) above.
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313. Which of the following categories is not permitted to trade in the forex market?
Commercial banks.
Recognized exporter.
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b.
fa
a.
c.
Development financial institution.
d.
e.
All the three categories mentioned in (a), (b) and (c) are permitted in the forex markets.
314. In the last few months the forex reserves in India have been increasing. Which of the
following sterilization policies would the Reserve Bank of India should adopt?
a.
Increase CRR.
b.
Decrease CRR.
c.
Decrease discount rate.
d.
Buy government securities .
e.
None of the above.
59
Macroeconomics
315. An expansionary fiscal policy combined with a liberal monetary policy results in
i.
A lower level of output.
ii.
A higher level of output.
iii.
A lower interest rate.

A higher interest rate.
v.
A lower or higher interest rate depending on the relative magnitude of fiscal and
monetary policies.
a.
(i) and (iii) above
b.
(i) and (iv) above
c.
(ii) and (iii) above
d.
(ii) and (v) above
e.
(I) and (v) above.
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iv.
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316. Which of the following is true if the central bank does not impose any reserve ratio?
The banking system can no longer affect the supply of money in the economy.
b.
The banking sector can create unlimited money supply.
c.
The lending capacity of banks would narrow down to zero .
d.
A rupee deposited in a bank reduces the money supply in the economy by one rupee.
e.
Money supply in the economy will be equivalent to the high-powered money.
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a.
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317. Which of the following policy instruments has the least outside lag?
Cash reserve ratio (CRR).
b.
Bank rate.
c.
Repo rate.
d.
Taxes.
e.
Open market operations (OMO).
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318. Which of the following happens when the central bank increases open market purchases?
Aggregate supply decreases.
b.
Rate of inflation increases.
c.
Interest rates will increase.
Pr
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a.
Aggregate demand decreases.
e.
Total output falls.
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d.
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Recognition lag
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a.
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319. The time between the interest rate changes and the corresponding changes in the spending
decisions of the public forms a part of
b.
Administrative lag
c.
Outside lag
d.
Inside lag
e.
Intermediate lag.
320. Bank rate means
60
a.
The rate of interest on inter-bank loans
b.
The rate of interest charged by banks on borrowers
c.
The rate of interest paid by banks to depositors
d.
The rate of interest charged by banks for loans given to the central bank of the country
e.
The rate of interest charged by the central bank of a country on its loans to other
commercial banks.
Part I
321. What would be the sequence of events when RBI increases money supply by reducing CRR?
i.
Interest rates fall.
ii.
Increase in investment expenditure.

Portfolio disequilibrium.
Increase in price of financial assets.
a.
(i), (ii), (iii), (iv).
b.
(iii), (iv), (i), (ii).
c.
(ii), (iii), (iv), (i).
d.
(iv), (iii), (ii), (i).
e.
(iii), (iv), (ii), (i).
20
04
04
iii.
iv.
Decreasing discount rate
b.
Buying government securities from banks
c.
Increasing cash reserve ratio
d.
Increasing tax rates
e.
Increasing government spending.
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a.
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322. If an economy is already under inflation, and there is increasing inflow of foreign exchange,
the central bank can sterilize the impact by
4-
02
Economic Growth, Development & Planning
1-
31
323. Which of the following can lead to decrease in Incremental Capital Output Ratio (ICOR)?
Low managerial efficiency.
b.
Complicated production procedures.
c.
Existing capital is less productive.
d.
Inadequate delegation of powers.
e.
Improvement in productivity of labor.
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a.
61
Part I: Answers (with Explanatory Notes)

1. (e) The variable that is measured over as period of time is a flow variable and the variable
which is measured at a point of time is a stock variable. While GDP and exports are
measured over a period, usually one year, CPI and money supply are measured at a specific
point of time. Hence, CPI and money supply fall under stock variables.
2. (a) While the consumption function explains how the income is spent on consumption, the
saving function describes what part of income is saved.
20
04
04
3. (d) In a two sector model, it is assumed that the whole income is spent on consumption and
savings. Symbolically, this can be represented by Y = C + S. Hence, savings can be known by
consumption expenditure from income (i.e. S = Y C).
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4. (c) The variable which is computed over as period of time is a flow variable and the variable
which is measured at a point of time is a stock variable. Unemployment, foreign exchange
reserves and money supply are measured at a particular point of time, and hence are stock
variables. Consumption is measured over a period of time, so is a flow variable.
ef
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5. (e) Gross domestic capital formation consists of addition to the inventories, addition to fixed
assets, and depreciation.
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6. (e) GDP = GNP Net factor income = [Consumption + Investment + Government

Expenditure + Net exports] Net factor income .
7. (a) Per capita growth = [(1 + g)/(1 + p)] 1 where g is the growth rate of GDP per annum and
p is the growth rate of population per annum.
8. (e) The operation of forces in an economy can be expressed in the form of a circular flow of
incomes and spending between the households and firms. It shows how the prices of
resources, goods and assets are determined and how production and household sectors
interact through the markets.
9. (b)
Stocks and flows variables are very essential in studying macroeconomics.
(a) Is not the answer because a stock variable is measured at a specified point of time where
as a flow variable is measured for a specified period of time. Both the stock and flow
variables have time dimensions. This is a true statement.
(b) Is the answer because flow variables are not always determined by stock variables.
Although a stock can change only as a result of flows, the flows themselves may be
determined in part by changes in stocks.
(c) Is not the answer because, stocks variables are usually affected by flow variables.
(d) Is not the answer because some macroeconomic variables have a direct counter-part
stock macroeconomic variables. Flow variables like, exports, wages, taxes, etc. May not
have direct counterparts, and they could indirectly affect other stocks.
(e) Is not the answer because flow variables are partly determined by stock variables.
10. (c) Circular flow of income refers to money flow from households in return for goods and
services produced by firms and money passes from firms to households in return for factor
services provided by households. If any part of the income is not spent with in the flow and
hence it represents leakages from the flow.
a. Since Mr. Ramesh is spending his money on consumption of goods, which would lead
to flow of income from households to the firms and hence no leakage from the system.
b. In the process of buying second hand refrigerator income is transferred from Mr. Babu
to Mr. Rajesh which represents consumption expenditure and hence income remains in
the system.
c. As Mr. Harsha imported a new Ferrari car, part of the income has gone out the flow in
order to pay for commodity which is not produced within the country. Money spent on
Ferrari becomes part of circular flow of exporting country and a leakage for the
importing country. Hence the answer is option c.
d. Salary paid represents flow of income from Mr. Sujit to his personal secretary.
e. Since (a) is not true, therefore e cannot be the answer.
62
Part I
(d) Economic developement is defined as a process of economic transition involving the

Structural transformation of an economy through industrialization. Economic development
leads to improvement in Standard of living of the people.
National Income deflator is the ratio of current price of National Income to constant
price of National Income. It is only a price index, cannot be used to measure economic
development.
b.
GNP at current prices measures the money value of final value of goods and services
produced by the residents of a country. The value of goods are measured by taking the
price goods existing in the current year. A increase in GDP at current prices need not
necessarily lead to economic development.
c.
Real National Income measures the final value of goods and services produced by the
residents of a country. The value of goods are measured by taking the prices existing in
the base year. An increase in real national income need not lead to economic
development if the population is increasing at a faster rate than that of real national
income. Hence, cannot be used as an indicator of economic development.
d.
Per Capita real national income is the best indicator, because an increase in per capita
real national income would mean that more goods are available per head, which would
mean the standard of living has increased.
e.
GDP deflator is an indicator of price index, on the basis of reason (a), it is not an
indicator of economic development.
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12. (a) GNP deflator is the ratio of nominal GDP to real GNP. Hence, if GNP deflator increases by
40%, the numerator should at least increase by 40%. If GNP deflator rises, it does not affect
Real GNP as Real GNP is adjusted with inflation.
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13. (b) Since real GNP is measured in terms of goods and services, production of more goods
and services increases real GNP. Nominal GNP is the value of goods and services in terms of
current market prices, thus nominal GDP increases with the increase in price level.
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14. (e) Currency with the public including small coins + Demand deposits with the bank and
other deposits with RBI is called narrow money (is denoted by M1).
s.
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15. (e) Broad money (M3) is also known as aggregate monetary resources and is equivalent to
M1 + time deposits with the banking system, where M1 is currency with the public + demand
deposits with the banking system.
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16. (c) NNP at market prices + Depreciation = GNP at market prices. Thus, if NNP at market
prices remains constant, GNP at market prices increases by an amount equal to rise in
depreciation.
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17. (d) The output method is followed either by valuing all the final goods and services produced
during a year or by aggregating the values imparted to the intermediate products at each stage
of production by the industries and productive enterprises in the economy. The sum of these
values added gives the gross domestic product at factor cost, which after a similar adjustment to
include net factor income from abroad gives gross national product at factor cost.
20
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18. (a) Under expenditure method we aggregate all money spent by private citizens, firms and
the government within the year to estimate the economys national income.
19. (a) GNP deflator is a price index constructed to reveal the cost of purchasing the items
included in the GNP during the period relative to the cost of purchasing. It is the ratio of
nominal GNP to real GNP.
20. (b) GDPMP = GDPFC + [Indirect Taxes Subsidies].
Where, Net Indirect Taxes = Indirect Taxes Subsidies.
This shows that GDP at market price exceeds GDP at factor cost by the amount of revenue
raised through indirect taxes, assuming that subsidies are not given.
63
Macroeconomics
21. (d) GDP at market price = GDP at factor price + Indirect Taxes Subsidies (or) GDP at
factor price = GDP at market price Indirect Taxes + Subsidies. We consider exports while
computing GDP at market price and factor price.
22. (e) Macroeconomics is concerned with the overall performance of the economy. It deals with
overall employment, inflation and growth of the economy as a whole.
23. (e) No conclusion can be drawn regarding the growth rate of a country based on the rate of
inflation in the country.
24. (a) In a closed economy, savings are equal to investments at the equilibrium level of income.
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25. (e) There are three most popular methods to calculate national income, all the three methods
are conceptually equivalent to each other. They are: (a) the output method, (b) the
expenditure method and (c) the income method.
04
26. (a) NNPMP = NDPMP + Net factor income from abroad.
Thus, net factor income from abroad
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= NNPMP NDPMP.
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27. (b) Balance of trade = Total merchandize exports Total merchandize imports.
Personal income Personal taxes = Disposable personal income.
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28. (d) National income + Transfer payments + Net interest and dividend = Personal income
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29. (c) Personal income = Personal disposable income (Yd) + Personal income taxes
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Where, Yd = Total income Taxes.
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31. (b) Net exports = Total exports Total imports.
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30. (b) Net national savings + Retained earnings of foreign companies = Net domestic savings.
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32. (c) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.
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33. (c) The price paid for a stolen car is not a market transaction, as it is illegal. Thus, while
computing GNP price paid for a stolen car is not included.
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34. (d) Macroeconomics is concerned with the overall performance of the economy. It deals with
overall employment, price stability and growth of the economy.
s.
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35. (b) Real GNP is expressed in terms of goods and services. So real GNP increases only when
there is an increase in the output of goods and services.
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36. (a) The operation of forces in an economy can be expressed in the form of a circular flow of
incomes and spending between the households and firms.
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37. (d) In a model where there is no government, investment, net investment, capital replacement
or international trade, the market value of final output is equal to the aggregate consumption
by the household sector or the sum of returns to all factors of production.
fa
38. (b) Expenditures on consumer goods are not included in gross investment.
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39. (a) In a model where there is household, business, government and foreign sector, the GNP is
given by the sum of the consumption (C), gross investment (I), government expenditure (G),
and net exports (E M).
GNP = C + I + G + E M.
40. (d) In a three-sector model,

Y = C + I + G = C + S + T.
41. (a) NNP at factor cost = National income = NNP at market prices Indirect taxes + Subsidies
42. (b) Personal income is the total income received by individuals that is available for
consumptions, saving and payment of personal taxes. Personal income does not include
undistributed corporate profits, as it remains with the enterprise and not distributed to
employees or shareholders.
43. (d) Nominal GDP is the measure of total value of goods and services produced during the
year at current market prices.
64
Part I
44. (e) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies
Thus, when subsidies are more than indirect taxes, GDP at factor cost exceeds GDP at market
price.
45. (c) GNP = GDP + Net factor income from abroad
Hence, net factor income from abroad = GNP GDP.
46. (b) NDP does not include depreciation [Hint: GDP Depreciation = NDP]
47. (a) NNP at factor cost = NDP at market price + Subsidies Indirect Taxes
48. (d) NNP at factor cost is also known as National Income.
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49. (e) Transfer payments are not taken into account while computing national income. National
income is computed by summing up payments to all factors of production.
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50. (d) Salaries paid by Microsoft USA to Indian programmers employed at New York is a part
of Indian GNP but not GDP, as the income is earned outside the boundaries of the country.
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51. (e) National product fails to account the household production because it neither a market
transaction nor involve money. It also makes no adjustment for harmful side effects that
some times arise from several productive activities and the events of nature (e.g. pollution,
noise, etc).
52. (e) GDP Deflator is a price index, which is used to measure the average level of the prices
of all goods and services that make up GDP.
(a) Is not the answer because it is a true statement that GDP deflator is otherwise known as
implicit price deflator.
(b) Is not the answer because GDP deflator reflects the change in overall price level in the
economy.
(c) Is not the answer because GDP deflator is the most comprehensive index of price.
(d) Is not the answer because GDP deflator is used to measure real GNP i.e. GNP in rupees
of constant purchasing power. If prices are rising, the nominal GNP during the latter
period to account for the effects of inflation.
(e) Is the answer because GDP deflator does not measure economic growth.
53. (e) Personal disposable income = Personal income Personal taxes.
(a) Is not the answer because the difference between personal disposable income and
personal income is not residential investment.
(b) Is not the answer because the difference between personal disposable income and
personal income is not indirect taxes.
(c) Is not the answer because the difference between personal disposable income and
personal income is not subsidies.
(d) Is not the answer because the difference between personal disposable income and
personal income is not transfer payments.
(e) Is the answer because the difference between personal disposable income and personal
income is personal taxes.
54. (c) Investment is the flow of expenditures devoted to increasing or maintaining the real
capital stock. When the addition to capital goods is more than the capital consumption
allowance, it will result in a positive net investment.
(a) Is not the answer because when the addition to capital goods is less than the capital
consumption allowance, it will result in negative net investment.
(b) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in zero net investment.
(c) Is the answer because when the addition to capital goods is more than the capital
consumption allowance, it will result in positive net investment.
(d) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in negative gross investment. Because gross
investment is the total investment that occurs in the economy within any specific time
period.
(e) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in zero gross investment.
65
Macroeconomics
55. (a) GNP deflator is a price index, which is used to reveal the cost of purchasing the items
included in GNP during the period relative to the cost of purchasing those items during a base
year. GNP deflator is used to measure real GNP i.e. in rupees of constant purchasing power.
If there is a rise in prices, the nominal GNP is deflated during the latter period to account for
the effects of inflation.
(a)
Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP.
(b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GNP.
(c)
Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP.
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(d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GDP.
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56. (d) Transfer payments are not considered as payment for current services or production.
These items are not entered in national income.
Is not the answer because salary paid to a soldier is the payment for current services and
hence it is not an examples of government transfer payments.
(b)
Is not the answer because purchasing of a new car for the Ministry of Finance is not an
examples of government transfer payments.
(c)
Is not the answer because funding of a clinic to provide free vaccinations is not an
examples of government transfer payments.
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(d) Is the answer because free food coupons issued to a persons in an antipoverty program
is not the payment for current services or production and hence it is an examples of
government transfer payments.
Is not the answer because funding of a new bridge in an urban area is the payment for
current services and hence it is not an examples of government transfer payments.
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57. (a) In India, Whole Sale Price Index (WPI) is widely used for determine of inflation.
Because the office of the economic advisor to the government of India publishes wholesale
price indices for individual commodities, commodity groups and the overall WPI monthly.
They are reported in a number of other publications also.
Is the answer because Whole Sale Price Index (WPI) is widely used for determine of
inflation in India.
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(a)
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(b) Is not the answer because GDP deflator is not used for determining inflation in India.
GDP deflator is used to reveal the cost of purchasing the items included in GNP during
the period relative to the cost of purchasing those items during a base year. And it is
difficult to bet the data for the two years for comparisons.
Is not the answer because in practice it is difficult to include each and every item for
construction of Consumer Price Index. (CPI)
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(c)
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(d) Is not the answer because both Whole Sale Price Index (WPI) and GDP deflator are not
used in measuring inflation.
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(e)
Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not
used in measuring inflation.
58. (c) Investment includes expenditure on the plant and machinery produced during the year,
expenditure incurred on construction activities (both residential and non-residential) during
the year and change in inventories.
(a) and (b) are not the answer as both are financial transactions, which do not form part of
investment.
(c) is the answer as change inventories is considered to be an investment.
(d) is not the answer as purchase of used vehicles amounts only to transfer of ownership and
not an investment.
66
Part I
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59. (a) Since the value added within the domestic territory will belong to the domestic factor
inputs, NDP at factor cost must be equal to domestic factor income.
Hence answer is (a).
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net Domestic Product at market price.
(c) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National Product at factor cost.
(d) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National Product at market price.
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Personal Income.
60. (a) By definition dividends and corporate taxes are part of corporate profits.
National Income refers to the factor income earned by the residents of a country and it
includes profits earned by entrepreneurs. Profit includes dividends and corporate tax. Hence
dividends and corporate tax are part of national income.
Hence dividends and corporate taxes are part of corporate profits and national income.
On the basis of the above reason, dividends and corporate taxes are part of corporate profits
(i) and National Income (ii). Hence this is true option.
Dividends and corporate taxes are not part of personal income, hence not the correct option.
On the basis of above reason, the option is not correct.
d.e. As given in the reason, dividends and corporate taxes are not part of personal income and
personal disposable income. Hence not correct option.
61. (a) All the options that are given measure price indices. Each of which is constructed with a
particular objective.
a. CPI represents the changes in the price of a basket of goods with respect to the prices
existing in the base year. The basket of goods that are considered are those that are used
commonly by consumers and they are grouped together as food items, housing, fuel and
light etc. Doctor fees, railway and bus fares are the items of expenditure of the
consumer, hence in the calculation of consumer price index they are given greater
weightage. Hence the option is correct.
b. Whole sale price index can be interpreted as an index of prices paid by producers for
their inputs. It gives more importance to items used in production process. Hence the
option is not correct.
c. Index of industrial production is a quantity index which covers mining, manufacturing
and electricity generation. Hence the items referred to in the question are not included.
Hence the option is not correct.
d. GNP deflator is a measure of real GNP i.e. GNP in rupees of constant purchasing
power. While calculating it no weights are assigned, hence the option is not correct.
e. Same reason as given in option (d).
62. (d) GDP refers to money value of final goods and services produced within the domestic
territory of a country including depreciation. There are certain goods which are produced but
will not be included in GDP. For example services of house wives.
Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is
part of GDP.
Purchase of new Ford car also refers to consumption expenditure and hence part of GDP
New computer purchased by Community Bank for its loan office refers to purchase of capital
goods. Hence it is part of capital expenditure and hence part of GDP.
Tomatoes grown in home garden by Market are not taken as part of GDP Even though goods
are produced, they are not taken as part of GDP as it refers to production for self
consumption. If she sells them in the market then it becomes part of GDP.
Ford India could not sell 100 cars, hence they are part of inventories and hence part of capital
expenditure. Hence included in GDP as part of capital goods expenditure.
67
Macroeconomics

63. (d) The multiplier is used more generally in Economics to mean the effect on some
endogenous variable of a unit change in an exogenous variable. The expenditure multiplier
relates the change in income to the change in autonomous spending.
64. (d) In the equation, consumption, C = 12 + 0.6 Y, 12 represents the autonomous investment
expenditure and 0.6 shows the marginal propensity to consume (MPC). If the marginal
propensity to consume (MPC) is 0.6, then the marginal propensity to save (MPS) is equal to
(1 0.6) = 0.4.
04
65. (b) The rachet effect is the situation where households find it easier to adjust to rising
incomes than falling incomes.
Expectations regarding movement of prices and income
Taxation policy
Age composition, etc.
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The stock of wealth
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66. (a) Amounts of consumption and saving not only depend upon the level of disposable
income, but on many factors. Changes in these factors cause shift in the consumption
function. This can lead to more or less consumption at the same level of income. Some of
these factors are:
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67. (c) The slope of the consumption function represents the Marginal Propensity to Consume
(MPC).
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68. (c) The Average propensity to consume can never exceed unity.
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69. (d) An automatic stabilizer is any mechanism in the economy that reduces the amount by
which output changes in response to a change in autonomous demand. The proportional
income tax levied by the government is an automatic stabilizer. Hence it does not affect the
balanced budget.
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70. (a) In the equation C = C + cY, C and c represent autonomous consumption and marginal
propensity to consume respectively. Autonomous consumption expenditure is the
consumption expenditure, which is independent to income level, Y. In other words, it is the
consumption expenditure when the income level is 0.
Pr
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71. (b) A change in an exogenous variable is categorized as an autonomous change because it is

determined by forces outside the economic model.
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72. (d) C = f(Yd, W) here Yd and W are independent variables explaining C.
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73. (c) In a two-sector economy, planned savings are equal to planned investments at the
equilibrium level of income.
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74. (b) When planned savings are not invested fully, part of the money saved would become
ideal and therefore, the output decreases.
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75. (a) When the value of output exceeds planned spending, there is unsold output, which leads
to drop in the level of income.
76. (d) Marginal propensity to consume refers to change in consumption as a result of change in
income, that is C/Y. C/Y is nothing but slope of the consumption function.
77. (a) The multiplier is used more generally in Economics to mean the effect on some
endogenous variable due to change in exogenous variable. The expenditure multiplier relates
the change in income to the change in autonomous spending.
78. (b) As autonomous spending for a particular consumption line is taken as constant while
constructing spending curve, any change in autonomous spending cause shift in the spending
line.
79. (c) When consumption spending lags the receipt of disposable income by one period it is
given by Ct = f(Yd,t-1).
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Part I
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80. (d) A single shock in autonomous demand produces a slow or distributed lag effect on
output. Dynamic multiplier shows how a given change in autonomous investment affects the
level of output overtime.
81. (c) Current account describes the trade in goods and services of a country with the outside
world. If current account balance shows a deficit, it represents that foreign exchange outflows
on goods and services, gifts and unilateral transfers are more than inflows.
82. (d) An increase in autonomous investment spending, transfers or a decrease in taxes cause an
increase in the level of income, but increase in net tax revenues does not cause an increase in
income.
83. (c) Ceteris paribus, introduction of taxes reduces the disposable income. This in turn
decreases the value of the expenditure and net tax revenue multiplier.
84. (b) Y = C+ I + G + E M
An increase in autonomous investment spending increases the income level in the country
that in turn increases imports. Consequently, the net exports become negative.
85. (d) Multiplier = 1/[1 b + MPI), where MPI is marginal propensity to import. This shows
inverse relationship between multiplier and marginal propensity to import. Thus, an increase
in the marginal propensity to import decreases the value of the multiplier.
86. (b) If an investment spending is negatively related to the rate of interest, equilibrium income
also relates inversely with interest rate, as investment spending is a component of equilibrium
income.
87. (d) In the consumption function, C = 256 + 0.85 Y, MPC = 0.85l and it remains constant,
whereas average propensity to consume will be changing with the income.
88. (b) Multiplier = 1/MPS where MPS is the marginal propensity to save; thus an increase in
marginal propensity to save decreases the value of multiplier.
89. (b) When the multiplier is one (or unity), it implies that output expands precisely by the
amount of the increased government purchases without any induced consumption spending.
So when the government expenditure increases by 100, the equilibrium income also increases
by 100.
90. (c) The term multiplier is used more generally in economics to mean the effect on some
endogenous variable of a unit due to change in an exogenous variable. The multiplier is
necessarily be greater than one in a simple model of income determination.
91. (d) Life Cycle Hypothesis states that the saving behavior of the individuals during their
working life is motivated by their desire to maintain consumption levels after retirement. The
permanent income theory argues that people gear their consumption behavior to their
permanent or long-term opportunities but not to their current level of income. The relative
income hypothesis argues that current consumption depends not only on current income but
also on the past behavior of the income.
92. (c) The term multiplier in macroeconomics refers to the change in an induced variable per
unit change in an external variable. Keynes multiplier denotes the number by which the
change in investment results in change in total output (or income). Thus, a multiplier of 3
implies that when investment increases by Re.1, income or output increases by Rs.3. But,
income Y = C + I + G + NE. Thus, if autonomous investment increases by Re.1, the income
increases by Rs.3. Out of that Rs.3; autonomous investment increases by Re.1 (given) and
consumption by Rs.2 (i.e. 3 1), assuming that government expenditure and net exports are
autonomous and do not influenced by the autonomous investment. (Note: Assume that there
are no imports).
93. (e)
The demand for precautionary balances represents money that is held as a precaution against
some unforeseen events such as medical emergency, accident etc.
This precautionary demand for money is inversely related to rate of interest and frequency
with which income is received. Lower the rate of interest and frequency with which income
is received, higher is the precautionary demand for money and vice versa.
(a) Is not the answer because precautionary demand for money varies directly with the level
of income.
(b) Precautionary demand for money is inversely related to rate of interest.
69
Macroeconomics
(c)
Is not the answer because precautionary demand for money varies directly with the
wealth a person held.
(d) Precautionary demand for money is inversely related to frequency with which income is
received.
(e)
Is the answer because precautionary demand for money is inversely related to rate of
interest and frequency with which income is received.
94. (e)
04
(a) Consumption depends on the income and as income increase consumption also increase.
Propensity to consume refers to the changes in consumption as a result of change in income.
Hence propensity to consume effects consumption.
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Propensity to save refers to changes in savings as a results of changes in income. The level of
savings affects the level of consumption. Hence changes in savings does affect consumption
d. Consumption demand does not depend upon the level of consumer spending.
e. Consumption demand does not depend upon the level of marginal efficiency of
investment.
95. (c) Consumption curve depicts the relationship between consumption and income.
APS is given by the ratio between saving and Income. Whereas the slope of the curve is
given by the ratio between change in consumption and income. Hence not correct
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APC refers to the ratio between consumption and Income, hence not the slope of the
consumption curve which as said above is given by changes in consumption as a result of
change in income.
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By definition, MPC refers to increase in consumption per unit increase in income. Which is
nothing but the slope of the consumption curve. Hence the option is true.
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MPS refers to change in savings as results of change in income and slope of consumption
curve gives the changes in consumption as a result of change in income. Hence not true.
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Level of consumption cannot be used to calculate slope of the consumption curve as slope
refers to ratio between changes in consumption and changes in income.
s.
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96. (b) Marginal propensity to consume refers to the change in consumption as a result of
increase in income. Part of the changed income is saved. Hence MPC is equal to 1-MPS.
Multiplier is the reciprocal of 1-MPC or MPS. Hence larger MPC means smaller MPS and
hence larger will be the value of the multiplier.
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Pr
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Statement (i) is false because as MPC is larger, MPS will be smaller as it is nothing but
1-MPC.
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Statement (ii) is true because multiplier is reciprocal of MPS and MPS is smaller as said
above.
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Statement (iii) is true. Average propensity to consume will depend on level of consumption
and income. Since the MPC is larger, consumption will also be larger and hence average
propensity to consume will also be larger.
Statement (iv) is false, as autonomous consumption is independent of MPC and hence it is
not possible to say anything about autonomous consumption on the basis of MPC.
Since both (ii) and (iii) are true, the option (c) is the answer.

97. (a) The IS curve explains the combination of interest rates and levels of output at which
planned spending equals income.
98. (e) The IS curve explains the combination of interest rates and levels of output at which
planned spending equals income. Thus, any factor other than interest rates shifts the IS
upwards or downwards. An increase or decrease in interest rates at an income level is only a
movement along the IS curve.
70
Part I
99. (e) IS curve equation can be written as i= A/ Y/.
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From this it can be known that larger the multiplier the flatter would be the IS curve. Since
the slope of the curve is dependent on the multiplier and the multiplier in turn dependent on
the tax rate. An increase in the tax rate increases the steepness of the IS curve. Hence options
(b) and (c) are correct.
100. (d) Factors other than interest rate shift the IS curve either upwards or downwards. In other
words, IS curve is constructed keeping other factors autonomous investment, government
expenditure, tax rate, etc. constant. As autonomous increase in investment increases the
income, the IS curve shifts toward right.
101. (a) The real money supply is held constant along the LM curve, thus a change in the real
money supply shifts the LM curve. Increase in real money supply shifts the LM curve down
and to the right.
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102. (a)
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From the graph it is clear that equilibrium in the goods market will be at a higher point than
the existing income.
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103. (a) A vertical (horizontal) LM curve represents zero (high) sensitively to interest rates.
Speculative demand for money is highly responsive to changes in interest rates. Hence, the
LM curve will be vertical, if there is no speculative demand for money.
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104. (b) The basic difference between IS and LM curve is that IS curve explains goods market and
LM curve explains money market.
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105. (b) LM schedule is a schedule of monetary equilibrium where the supply of money equals the
demand for money. The equilibrium where the demand for real balances of money equals to its
real supply of money is described by the LM schedule.
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106. (d)
107.
108.
109.
110.
From the graph we can notice that if income and interest rates increase IS curve shifts to the
right.
(e) A shift in the IS curve occurs when factors other than interest rate affect the IS curve.
Changes in all the factors mentioned shift the IS curve upward or downward.
(c) The slope of the LM curve is dependent upon the demand function for money in the
economy.
(d) The steepness of the IS curve depends on the multiplier and investment sensitiveness to
changes in interest rates. A steeper (flatter) IS curve indicates lesser (higher) sensitivity to
interest rate changes. Since investment demand is infinitely interest elastic in the given
problem, the correct answer is (d).
(a) An expansionary monetary and fiscal policy increases the aggregate demand in the
economy, which leads to shift in AD curve towards right.
71
Macroeconomics
111. (d) One of the main determinants of the demand for money is the level of income. If prices
remain constant larger money balances are required to conduct the larger volume of business
with an increase in the quantity of goods bought and sold. Thus if nominal GNP increases the
demand for money balances also goes up. This shows direct/positive relationship between the
demand for money and income levels. If interest rates go up demand for money balances
decreases and people tend to invest or deposit the money, which implies an inverse
relationship between the demand for money and interest rates.
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112. (a) When the income level increases, the demand for money function shifts toward right. As
a result of upward shift, both quantity of money demanded and rate of interest increase (see
figure below).
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113. (b) All the points on IS curve indicate equilibrium in the goods market and all the points on
LM curve represent equilibrium in the money market. Therefore, simultaneous equilibrium in
both the markets is possible only at the intersection of both the curves that is only at one
income level and interest rate.
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114. (b) The liquidity effect refers to the immediate effect on market interest rates due to changes
in the money supply that are predicted from the liquidity preference framework. Within that
framework an increase in the money supply would reduce interest rates. This reduction would
be the liquidity effect.
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115. (c) The liquidity effect refers to the decrease in the real interest rate following an increase in
the money supply. Liquidity effect will result in an income effect, as lower interest rates will
increase interest-sensitive spending.
116. (a) If the private sector spending is more interest sensitive the change in interest rate caused
by the changes in money supply will have a greater effect on the equilibrium income.
117. (c) If the sensitiveness of demand for money to interest rates is high the LM curve is steeply
sloped. In that case changes in money stock are totally ineffective in influencing the equilibrium
output.
118. (d) Crowding out refers to a situation where due to increase in government spending the
interest rate in the market goes up and private investment will come down. Thus, crowding
out is more likely to occur when the demand for money is interest-insensitive and private
sector spending is interest-sensitive.
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Part I
119. (c) Crowding out will occur when a reduction in income taxes causes higher interest rates,
which crowd out interest-sensitive private spending. Note that crowding out refers to a
situation where due to increase in government spending the interest rate in the market goes
up and private investment will come down.
120. (c) Real money supply = Nominal money supply/Price level. Hence, decrease in price level
(or inflation) increases the real money supply in the market.
121. (b) Increase in the price level reduces the real money supply and from the LM curve equation
it is known that if real money supply decreases LM schedule shifts to the left.
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122. (b) As investment spending is inversely related to the interest rates, any fall in real and
nominal interest rates increases the investment spending in the economy.
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123. (e) The growth rate in nominal stock of money, Gm = aGy + Gp where Gy is the real GDP
growth rate and Gp is the rate of inflation.
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124. (a) The amount of wealth that households and business desire to hold in the form of money
balances is called the demand for money. The liquidity preference function shows the
demand for money balances and its relationship with the interest rates.
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125. (a) The mechanism by which the changes in monetary policy affect the aggregate demand is
called transmission mechanism. This shows the relationship between the goods market and
money market.
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126. (e) Price elasticity of demand for different points on the linear demand curve. A reduction in
the rate of interest rate increases the profitability of additions to the capital stock and
therefore leads to a larger rate of planned investment spending. This implies a negative
relationship between interest rates and investment spending.
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127. (c) A supply shock such as failure of monsoon or increase in the price of oil causes a
leftward shift in the aggregate supply curve that results in lower equilibrium output and
higher prices.
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128. (c) The level of autonomous spending is A = C + TR + I + G. Thus, an increase in

government purchases or transfer payments will shift the IS curve out and to the right.
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129. (a) Changes in money stock are totally ineffective in influencing equilibrium output and
interest rate if the demand for money is infinitely interest elastic.
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130. (b) IS curve shows the equilibrium in the goods market. It reflects the relationship between
interest rate and output. As interest rate is negatively related to output (i.e. if interest rate
increases, output decreases and vice versa), the IS curve slopes downward. Hence (b) is
wrong.
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131. (c) Crowding out is the process where expansionary fiscal policy like tax cut or increase in
government spending causes interest rates to rise thereby reducing private spending
particularly investment.
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132. (b) Transaction demand for money varies positively with income and inversely with rate of
interest. In words, higher (lower) the income, higher (lower) is the demand for money. On the
other hand, higher (lower) the interest rate, lower (higher) is the demand for money.
133. (a) IS curve is negatively sloped indicating that interest rate is negatively associated with the
aggregate demand. A rise in the interest rates reduces both consumption and investment,
which results in decline in aggregate demand.
[Hint: AD = C + I + G].
134. (c) A rise in government expenditure increases the interest rates in the economy, which lead
to reduction in interest-sensitive private investment.
135. (c) When government spending increases at unchanged interest rates, the level of AD
increases to meet the increased demand for goods. Because of this increase in income the
quantity of money demanded goes up which in turn pushes up the interest rate. So both
interest rate and income increase.
73
Macroeconomics
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136. (b) If investment is insensitive to the interest rates, IS curve stands vertical indicating a
constant level of income. When the level of income remains constant, shifts in LM curve
does not change the equilibrium income, but only affect the interest rates in the money.
Hence, a shift in IS curve (i.e. changes in the goods market) determines the equilibrium
income.
137. (e)
Liquidity trap occurs when there is no decrease in the interest rate despite an increase in the
money supply. This results in an addition to idle balances.
(a) Is not the answer because when the economy is facing a situation of liquidity trap, there
is no future expectation of rise in the interest rate. So public hold money rather than
using for investment. The statement is true.
(b) Is not the answer because LM curve gives the combination of income and interest rates
which produce equilibrium in the money market. As the interest rate remains at the
critical rate, the speculative demand for money is nil. As the interest elasticity of
demand is infinity, the LM curve will be horizontal. The statement is true.
(c) Is not the answer because as the interest rate does not increase, a sound fiscal policy
such as tax and expenditure policy will help in increasing the income. The fiscal policy
has a direct bearing on the level of aggregate demand and the level of economic activity.
The is a true statement.
(d) Is not the answer because monetary policy is ineffective in affecting the interest rate due
to the infinite interest elasticity of demand for money. The is a true statement.
(e) Is the answer because LM is not vertical rather than horizontal when there is liquidity in
the economy.
138. (b)
The amount of wealth that household or business hold in the form of money balances is
referred to as demand for money. Individuals and firms may hold part of their wealth in the
form of money to take the advantage of decrease in prices. Speculation can be done on price
of stock and bonds. Securities prices are linked to interest rates and inversely proportional to
a change in interest rates. With a rise in interest rates, prices of securities fall and the
speculative demand for money also comes down. Contrary to this, if the interest rates fall,
securities prices rise and demand for speculation purposes also rises. Thus speculative
demand is inversely proportional to the rate of interest.
(a) Is not the answer because transaction demand for money is largely influenced by level
of income and the frequency with which income is received.
(b) Is the answer because there is an inverse relationship rate of interest and the speculative
demand for money.
(c) Is not the answer because the demand for precautionary balances represents money that
is held as a precaution for some unforeseen events such as medical emergency, an
accident etc. The precautionary demand for money is highly influenced by level of
income.
(d) Is not the answer because an inflationary expectation does not represent an inverse
relationship between the interest rate and the demand for money.
Is not the answer because the relationship between the interest rate and the demand for
money is inverse, not direct.
139. (e)
(a) Is not the answer because IS curve shows the combinations of income and interest rates
which reflects the goods market equilibrium.
(b) Is not the answer because LM curve shows the combinations of income and interest
rates, which reflect the money market equilibrium.
(c) Is not the answer because interest rate is a variable in both the IS and LM model.
(d) Is not the answer because the equilibrium level of national income is determined when
there is a simultaneous equilibrium in the goods market and money market.
(e) Is the answer because IS curve is not positively sloped rather it is negatively sloped.
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Part I
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140. (d) If the government raises tax rate, it has an effect on the IS curve because it is a fiscal
policy and the IS curve shifts to left. And at the same time the Reserve Bank of India keep
the money supply constant. It implies that there is no change in the LM curve. This will result
in a fall in the interest rate.
(a) Is not the answer because when the Government raises tax rate, disposable income
falls.
(b) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, the IS curve shifts to the left.
(c) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, there is no shift in the LM curve.
(d) Is the answer because if the government raises tax rate and the Reserve Bank of India
hold the money supply constant, the IS curve shifts to the left while LM curve
unchanged means that the interest rate falls.
(e) Is not the answer because interest rate does not increase.
141. (a) The LM curve gives the combinations of income and interest rates, which produce
equilibrium in the money market. For all points in the LM curve, the demand for real
balances is equal to supply of real balances. The LM curve shows a positive relationship
between rate of interest and level of income.
(a) Is the answer because the LM curve shows a positive relationship between rate of
interest and level of income.
(b) Is not the answer because the LM curve does not show a negative relationship between
rate of interest and level of income.
(c) Is not the answer because the LM curve does not show a negative relationship between
rate of interest and level of investment.
(d) Is not the answer because the LM curve does not show a positive relationship between
rate of interest and level of investment.
(e) Is not the answer because the LM curve does not show a positive relationship between
level of investment and level of income.
142. (e) An increase in government expenditure results in an increase in the level of income and
an increase in the interest rate. It will shift the IS curve to the right. But LM curve remain
unchanged because an increase in government expenditure, a fiscal policy measure, has no
impact initially in the asset markets.
(a) Is not the answer because an increase in government will not shift both IS and LM
curve to the right.
(b) Is not the answer because an increase in government will not shift both IS and LM
curve to the left.
(c) Is not the answer because an increase in government will not shift IS curve to the left.
(d) Is not the answer because an increase in government will affect IS curve.
(e) Is the answer because an increase in government will not shift the position of LM curve
but shift IS curve to the right.
143. (d) The relationship between demand for money and interest rate is given by the LM curve.
The relationship between interest rate and demand for money is negative. The LM curve
gives the demand schedule for a particular income level.
a. If there is an increase in the level of income because of increase in real money supply,
there is no shift in the IS curve.
b. As at the same interest rate, the demand for money increases with the increase in
income level. The LM curve will shift to the right and hence the option is not correct.
c. There will be increase in the real balances as income increases, but no shift in the IS
curve.
d. As per the reason given in the option (b), the LM curve shifts to the right and hence
option d is the correct answer.
e. The entire increased income need not be used for consumption as part of it goes into
savings and hence the increased income need not be equal to changed income. Hence
this option is not correct.
75
Macroeconomics
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144. (a) An increase in the real stock of money tend to bring down interest rates in the market,
which in turn increases the aggregate demand (indicated by an upward shift in the AD curve).
An increase in real stock of money shifts the LM schedule down and to the right.
145. (a) Expansionary fiscal policies shift the IS and AD curves towards right.
146. (b) Real stock of money = Nominal stock of money/Price level. Hence, any decline in the
price level increases the amount of real stock of money.
147. (e) The increase in the price level reduces the real balances and the LM schedule shifts up
and to the left until a new equilibrium for supply and demand is reached.
148. (b) If all the resources available are fully employed then aggregate supply curve in the long
run will become vertical indicating that the quantity of goods supplied cannot be increased
further.
149. (e) All the factors given are determinants of aggregate demand in an economy.
150. (e) All the factors given are determinants of aggregate supply in an economy.
151. (b) Increase in real wages attract more labor, as a result labor supply will increase. But at
high wages firms tend to employ lesser labor, leading to lesser demand for labor.
152. (b) The demand for money is the demand for real money balances real balances for
short because people hold money for what it will buy. Demand for money depends upon
the real income and real interest rate. It depends on the level of real income because
individuals hold money to pay for their purchases, which in turn, depend on the income. The
demand for money also depends upon the cost of holding money, which is indicated by real
interest rate.
153. (a) Business firms will produce at maximum efficiency because of the market forces of both
supply & demand.
154. (b) From the figure, it is clear that a rightward shift of aggregate demand, with no change in
aggregate supply schedule, results in an increase in real output and no change in the price
level when aggregate supply is horizontal.
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155. (b) Aggregate demand is negatively related to the price level because a decline in the price
level has a positive effect on the demand for output.
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156. (a) The slope of aggregate demand becomes flatter, it indicates more sensitivity to the
investment spending to the changes in the rate of interest.
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157. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of
labor schedules adjust immediately to a change in the price level.
158. (b) Decrease in taxes shift the aggregate demand curve upwards. When the supply curve is
vertical, an upward shift in aggregate demand curve increases the price level. However, it
will not have any effect on real output (see figure below).
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Part I
159. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to
increase in price level. But it will not have any effect on the real money supply or the
composition of output, because the economy already running at full employment.
160. (d) For given wages, profit margins and labor productivity a change in the real price of the
commodities will increase prices simply because it raises costs. The impact is the AS curve
shifts upward and to the left at each level of output.
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161. (b) The mark-up pricing singles out 3 determinants of prices the money wages, the unit labor
requirement or its reciprocal, labor productivity and the mark-up rate. A rise in any of these
3 determinants will increase the price that firms set for their output. Conversely a decline in
wages, a rise in productivity, or a fall in the mark-up rate will lower costs and therefore lower
prices and AS schedule shifts to down and right.
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162. (c) Decline in the nominal money supply growth reduces the inflation rate and the level of
output in the short run.
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163. (d)
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From the figure, it is clear that with an upward sloping aggregate supply curve in the short
run, an increase in aggregate demand causes rise in general level of prices.
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164. (c) When the depreciation is greater than the net investment, it will lead to the decline of an
economys capital stock.
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165. (e) Since the price elasticity of demand coefficients for demand schedules D2 and D4 are less
than one, total revenue for good 2 and good 4 increases with decrease of price.
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166. (d) When government spending is used as a policy instrument in order to achieve full
employment, it is called internal balance.
167. (a)
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The aggregate supply explains the production behavior of an economy. If the actual price
achieved is more than the expected price, firms will experience a higher than anticipated
level of profits. This will lead to increase in production. Thats why the short run aggregate
supply curve slopes upward. But in the long run, the difference between expected and actual
price levels is negligible. In the long run, the output of an economy does not depend on the
price level, but on factors such as labor import costs, capital stock, technological progress,
etc. So aggregate supply curve of an economy in long run is vertical.
(a)
Is the answer because aggregate supply curve is positively sloped in the short run and
vertical in the long run.
(b) Is not the answer because aggregate supply curve is not positively sloped in the short
run as well as in the long run.
(c)
Is not the answer because aggregate supply curve is not positively sloped in the short
run as well as in the long run.
(d) Is not the answer because aggregate supply curve is not positively sloped in the short
run and negatively sloped in the long run.
(e)
Is not the answer because in the long run, output of an economy does not depend on the
price level, but on factors such as labor import costs, capital stock, technological
progress, etc.
77
Macroeconomics
168. (b) AD curve gives the relation between quantity of goods and services demanded and price
level. Apart from price, AD is also affected by
i.
A change in income
ii.
Rate of interest
Government policy
A change in exchange rate and
v.
Transfer payments
a.
A decrease in income of foreigners will have its impact only on the aggregate demand
of the country to which they belong to and not on the domestic economy. Hence, there
is no impact on the aggregate demand.
b.
Transfer payments refer to incomes such as pensions, gifts etc. which are unilateral
payments. They add to the income of the receiver. Hence private transfers from abroad
will add to the income and leads to increase in aggregate demand.
c.
A decline in government expenditure leads to decrease in aggregate demand as less

money is available for various government activities and hence demands fewer goods.
d.
Increase in interest rates makes loans demanded for investment and consumption
purposes costlier. The people would prefer to wait until the interest rates come down
and hence the aggregate demand will less.
e.
An increase in tax rates will lead to decrease in disposable income in case of direct
taxes and investment demand in case of corporate taxes. The net impact is that
aggregate demand will decrease.
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iii.
iv.
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169. (e) Realized output refers to aggregate supply and spending refers to aggregate demand. If
aggregate supply is greater than aggregate demand, it results in fall in price, output and
employment.
Since aggregate demand is falling short of aggregate supply, demand is lower and hence
there is not new investments which would mean there will be increase in
unemployment.
b.
Since there is lower demand, prices will decline.
c.
Since there is excess supply, there is no possibility of providing new employment. At

full employment aggregate supply is equal to aggregate demand.
d.
There is excess supply in the economy i.e. there is unsold stock which leads to increase
in inventories. Hence true.
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170. (e) In long run the economy will tend towards output which is referred to as natural rate of
output.
True, because long equilibrium is characterized by tendency towards natural rate of
output
In long run output of an economy does not depend on the price level, but on labor,
import cost, capital stock, technological progress etc., hence true.
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a.
c.
True, input costs play a greater role in the determination of equilibrium output.
d.
At natural rate the aggregate supply is vertical as it is insensitive to price hence true.
e.
Since price does not have any impact of output in long run, unanticipated price also has
no role. Hence this option is not true.
171. (c) Aggregate supply curve gives the relationship between net national product that would be
supplied at each general price level.
Deficit demand refers to a situation where aggregate demand is falling short of aggregate
supply, hence price decrease. This results us decrease in supply. Hence the supply curve will
be positive sloped.
In case there are idle resources, as the prices increase firms can increase supply by utilization
of idle resources. Hence the relationship between supply and prices is positive.
78
Part I
In a situation where all the resources are fully employed, the firms will not be in a position to
increase the supply even if prices are increased. Hence the supply curve will be vertical.
Hence the correct option.
Aggregate supply curve is vertical in short run as the resources are fully employed. Labor is a
variable factor in short run, hence the available labour force is fully employed.
Vertical supply curve only means that all the available resources are fully employed, it is not
necessary that all firms must earn normal profits.
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172. (c) The currency with the public is equal to the notes and coins in circulation and demand
deposits with banks.
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173. (e) Money supply = [(1 + Cu)/(Cu + r)] x H
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As both Cu and H are constant, an increase in reserve ratio decreases money supply, but at a
lesser proportion.
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174. (d) M3 = M1 + Time deposits with the banking system.
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M4 = M3 + Total post office deposits.
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175. (e) M3 = M1 + Time deposits with the banking system and M4 = M3 + Total post office
deposits. Thus, both M3 and M4 include time deposits with the banking system.
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176. (b) Bank rate is the rate at which the central bank is prepared to discount or rediscount the
commercial bills brought to it by commercial banks.
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177. (c) Lowering the reserve requirements and increasing the volume of reserves rises the money
supply in the market. [Hint: Money supply = {(1 + c)/(c + r)} H]
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Or, r = Reserve ratio = R/(DD + TD)
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Ceteris paribus, a reduction in reserve ratio therefore increases the DD component in the
money supply.
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178. (e) The RBI money together with government money constitutes the monetary base which is
known as high powered money. High powered money = Currency with the public + Reserves
+ Other deposits with RBI.
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179. (c) This transaction does not make any change in money supply because it is already in
circulation.
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180. (b) Both the statements are wrong, so the answer is b.
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181. (d) Money supply, Ms = (1 + Cu)/(Cu + r) x H.
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182. (a) The RBI money together with government money constitutes the monetary base which is
known as high powered money.
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183. (e) Money multiplier = (1 + Cu)/(Cu + r). Thus, if currency deposit increases the multiplier
decreases less than proportionately to the increase.
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184. (c) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net physical
capital formation. FIR shows the relation between financial development and the growth of
physical investment.
185. (e) The RBI money together with government money constitutes the monetary base which is
known as high powered money. High powered money, H = M3/m, where m is the money
multiplier.
186. (d) M3 = M1 + Time deposits with banks
M2 = M1 + Post office savings deposits.
187. (e) Money Multiplier = [(1 + Cu)/(Cu + r)]
Therefore, if reserve ratio, r is constant and currency deposit ratio, Cu increases then money
multiplier decreases less than proportionately to the increase of currency deposit ratio.
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Macroeconomics
188. (c) Savings deposits are not a part of money stock measure (M1) because they are not
recognized as legal tender by the RBI and are not readily convertible to cash.
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189. (c) Increase in corporate income tax at constant interest rates will discourage the investment.
Hence, the volume of investment will not increase.
190 (d) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net
physical capital formation. FIR shows the relation between financial development and the
growth of physical investment.
191. (a) Change in money supply induces change in interest rates, which affects the investment
spending that in turn affects the aggregate demand and output.
192. (b) New issue ratio = Primary issues by non-financial sector/total physical asset formation.
193. (a) Creation of credit is a major function of a commercial bank. When a bank creates credit
or advances loans, there tends to be a multiple expansion of credit in the banking systems.
(a) Is the answer because credit creation by the commercial bank is limited by the Cash
Reserve Ratio(CRR), i.e. every commercial bank must keep on deposit with the Reserve
Bank certain amounts of funds equal to a specified percentage of it is own deposit
liabilities.
(b) Is not the answer because commercial banks cannot create as much credit as they want.
Is not the answer because RBI has control over the credit created by commercial banks.
(d) Is not the answer because CRR has an impact on credit creation
194. (b) The balance sheet of Reserve Bank of India contains particulars of 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.
195. (e) A well-developed financial system is vital for the smooth functioning of an economy. The
financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New Issues
Ratio and Intermediation Ratio are indicators of financial development of a country.
(a) Is not the answer because Finance Ratio is an indicator of financial development of a
country.
(b) Is not the answer because Financial Interrelation Ratio is an indicator of financial
development of a country.
(c) Is not the answer because New Issues Ratio is an indicator of financial development of a
country.
(d) Is not the answer because Intermediation Ratio is an indicator of financial development
of a country.
(e) Is the answer because Cost Benefit Ratio is not an indicator of financial development of
a country.
196. (c)
Money supply = H (1+ Cu / Cu + r)
Where, H = Monetary Liabilities of Central Bank + Government Money.
Cu = Currency-deposit ratio
r = Cash reserve ratio.
(a) Is not the answer because when the RBI increases cash reserve ratio (CRR), monetary
liabilities of the RBI decreases.
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Part I
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(b) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), high
powered money in the economy increases.
(c) Is the answer because when the RBI increases Cash Reserve Ratio (CRR), the value of
money multiplier decreases.
(d) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), aggregate
demand in the economy decreases.
(e) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), price
level in the economy decreases.
197. (d) M1 = Currency with the public + Demand deposits with the banking system + other
deposit with the bank.
M3 = M1+ Time deposits with the banking systems.
(a) Is not the answer because the difference between M3 and M1 is not the demand deposits.
(b) Is not the answer because the difference between M3 and M1 is not the post office
savings deposits.
(c) Is not the answer because the difference between M3 and M1 is not the savings deposits.
(d) Is the answer because the difference between M3 and M1 is the time deposits.
(e) Is not the answer because the difference between M3 and M1 is not M2.
198. (d) Given the demand for money, an increase in money supply lowers the nominal rate of
interest. Decrease in rate of interest increase interest sensitive expenditure like consumption
and investment, thereby increasing AD.
a. Is not the answer because other things being equal, an increase in the supply of money
does not lowers both nominal interest rate and aggregate demand.
b. Is not the answer because other things being equal, an increase in the supply of money
does not raises both nominal interest rate and aggregate demand.
c. Is not the answer because other things being equal, an increase in the supply of money
does not raise nominal interest rate and lowers aggregate demand.
d. Is the answer because other things being equal, an increase in the supply of money
lowers nominal interest rate and raises aggregate demand.
e. Is not the answer because other things being equal, an increase in the supply of money
do change nominal interest rate or aggregate demand.
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Equilibrium in the Classical Model
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199. (b) Since the theory of income distribution is a short run theory both the capital stock and
technology are assumed to be constant. Thus, output in the short run depends only on
quantity of labor input, i.e. Y = f (N), where N represents quantity of labor input.
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200. (c) The firms demand the labor so long as the cost of hiring additional worker is less than the
revenue gained (i.e. w = P. MPL).
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201. (e) Under pure competition a profit maximizing firm hires workers until the money wage w
is equal to the general price level P multiplied by Marginal Product of Labor (MPL).
Symbolically, w = P.MPL or w/P = MPL, where w/P represents real wage rate.
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202. (d) The amount of labor demanded is negatively related to real wage rate. That is, an increase
(decrease) in real wages will increase (decrease) the quantity of labor demanded.
203. (e) Marginal Product of Labor (MPL) represents the change in output per unit change in labor
employed. If the change in input is Y and change in labor N, then MPL = Y/N.
204. (d) According to Says Law of Markets supply creates its own demand. Over production
and unemployment are not possible in long run as price and wages adjust to remove both of
them. Only in short run disequilibrium can exist.
a.
True, as in short run over production and unemployment are possible.
b.
Disequilibrium occurs because of mismatch between demand and supply, hence true.
c.
True, in the short run there can be excess production and unemployment.
d.
False, in long run price, wages adjust freely and bring about equilibrium.
e.
True flexible hence price and wages are not rigid.

81
Macroeconomics
205. (b) The long run effect of an increase in government spending in the classical model is to
increase the price level as the long-run aggregate supply curve is considered to be vertical.
Therefore any increase in demand is simply inflationary.
(a)
Is not the answer because in the classical model, the long run effect of an increase in
government spending is not an increase in the price level.
(b) Is the answer because in the classical model, the long run effect of an increase in
government spending is an upward shift of the aggregate demand curve.
(c)
Is not the answer because in the classical model, the long run effect of an increase in
government spending is not an increase in the level of output.
04
Is not the answer because (a), (b) and (c) above cannot be the answer.
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(e)
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(d) Is not the answer because both (a) and (b) above cannot be the answer.
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Equilibrium in the Keynesian Model
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206. (d) Contrast to classical model, where wage rate is flexible, in the Keynesian model, workers
oppose to any decrease in their money wages.
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207. (a) The real difference between the classical model and the Keynesian model lies in the
assumption of rigid money wages. Contrast to classical mode, where wage rate is flexible, in
the Keynesian model, nominal wages are flexible upward but rigid downward.
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208. (e) As in the classical system Keynesian system also consists of 3 basic markets the labor
market, the money market and the goods market.
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209. (c) Says law states that supply of goods creates its own demand.
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210. (e) In Keynesian system, equilibrium takes place at a less than full employment level of
output.
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211. (c) Real wage = w/P where w is money wage and P is the price level. Thus, if the price level
falls, real wages increase, given the money wage.
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212. (b) At a higher real wage business firms will not wish to hire many workers. But the higher
real wage brings forth more labor, which results in unemployment.
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213. (e) Increase in prices at a constant nominal money wages decreases real wages and increases
employment. At a higher real wage business firms will not wish to hire more workers,
resulting in increase in unemployment.
214. (e) As against classical theory, Keynesian analysis was completely a demand side approach.
It says that demand induces firms to produce or supply goods and services. Keynes also
advocated that demand for money determines the supply of money in the market.
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215. (e) Investors prefer holding money in bonds when they expect an increase in interest rate and
capital loss from a bond.
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216. (b) Since nominal wages are assumed flexible upwards the aggregate supply curve will be
perfectly price inelastic at the full employment level.
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217. (e) All the three statements given are true in case of an economy in equilibrium.
218. (e) Individuals and firms may want to maintain part of their wealth in the form of money to
take advantage of price reduction. This is because, if price reduces, the value of money
increases.
219. (c) Classical model assumes that real wages adjusts automatically to bring about equality of
demand for and supply of labor; on the other hand, the Keynesian model assumes that
nominal wages (w) is rigid downward.
220. (e) The statements a, b, c and d are true with regard to Keynesian model of income
determination. Statement c is not true.
221. (b) Increase in autonomous government expenditure has direct impact on aggregate demand,
which causes production of more goods and services thereby increasing the level of income.
This increase in quantity of money demanded will in turn lead to an increase in interest rates.
82
Part I
222. (c)
In the Keynesian model, actual expenditure and planned expenditure is same at the
equilibrium level of output. When the actual expenditure is less than the planned expenditure
in the economy, there will be a positive inventory investment in the economy.
(a)
Is not the answer because there will not be a positive fixed investment in the economy.
(b) Is not the answer because there will not be a negative fixed investment in the economy.
(c)
Is the answer because there will be positive inventory investment in the economy.
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(d) Is not the answer because there will not be negative inventory investment in the
economy.
Is not the answer because there will be change in the inventory investment in the
economy.
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(e)
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223. (e)
Is not the answer because Keynes considered the existence of full employment as a
special case. The Keynesian underemployment equilibrium is reflecting real life
situations.
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(a)
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(b) Is not the answer because aggregate demand or effective demand indicates the total
quantity of goods and services that people want to buy. According to Keynes, effective
aggregate demand determines the level of employment and output.
Is not the answer because Keynes argues that State intervention is essential as full
employment is not possible in an economy.
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(c)
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(d) Is not the answer because Keynes argues that an economy facing recession, budget
deficit is an important tool to overcome recession.
Is the answer because in the Keynesian model, monetary policy is not effective as
compared to fiscal policy. Rather it is the fiscal policy, which is very effective and
powerful. Keynes argues that government should maintain an active stance with a
combination of tax and expenditure policies to maintain the desired levels of output and
employment through manipulation of effective demand.
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(e)
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224. (a)
fa
Is the answer because unemployment in the Keynesian model is caused by demand

deficiency.
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In the Keynesian model, unemployment could be reduced if the aggregate demand increases.
Therefore, unemployment is caused by demand deficiency. The Keynesian theory of
unemployment suggests that governments can play an active role in the economy by
adjusting the aggregate demand through its fiscal and monetary instruments.
(b) Is not the answer because unemployment in the Keynesian model is not caused by
supply deficiency.
(c)
Is not the answer because unemployment in the Keynesian model is not caused by
demand sufficiency.
(d) Is not the answer because unemployment in the Keynesian model is not caused by
supply sufficiency.
(e)
Is not the answer because unemployment in the Keynesian model is not caused by both
demand deficiency and supply deficiency.
83
Macroeconomics

225. (c) According to monetarists, the money supply is the principal determinant of the levels of
output and employment in the short run and the price level in the long run. It is based upon
the monetarist formulations of the demand for money function and the transmission
mechanism. Monetarists argue that the demand for money is no longer a function solely of
the interest rate and income, but that the rate of return on a much wider spectrum of physical
and financial assets will influence an individuals demand for money.
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226. (e) The monetarism theory conclusion is that an increase in money supply leads to a
significant increase in AD, which in turn leads to increase in price level.
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227. (e) The hypothesis of rational expectations has three important implications for
macroeconomic analysis and policy.
Econometric models are not very useful in evaluating alternative economic policies.
ii.
There is no trade-off between inflation and unemployment.
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228. (a) Discretionary monetary and fiscal policy cannot be used to stabilize the economy.
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The rational expectations theory suggests that individuals do not make systematic forecasting
errors and that their guesses about future are on an average correct.
229. (e)
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Supply side economics advocates to reduce government controls, to promote competition, to

restrict the power of trade unions and to remove institutional barriers. Supply side economics
does not recommend to increasing corporate tax rate.
Is not the answer because supply side economics recommend reducing government
controls to improve market efficiency.
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(a)
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(b) Is not the answer because supply side economics recommend promoting competition to
improve market efficiency.
Is not the answer because supply side economics recommend restricting the power of
trade unions to improve market efficiency.
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(d) Is not the answer because supply side economics recommend removing institutional
barriers to improve market efficiency.
Is the answer because supply side economics does not recommend increasing corporate
tax rate to improve market efficiency.
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(e)
230. (d)
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The Laffer curve depicts the relationship between tax revenues and tax rates. The shape of
the Laffer curve is backward bending indicating that tax revenues initially increase and then
decrease as the tax rate increases.
Is not the answer because according to Laffer curve, tax revenues do not rise
continuously as the tax rate increases.
(b) Is not the answer because tax revenues do not decrease continuously as the tax rate
increases.
(c) Is not the answer because tax revenues do not decrease initially and then increase as the
tax rate increases.
(d) Is the answer because tax revenues increase initially and then decrease as the tax rate
increases.
(e) Is not the answer because tax revenues do not remain constant as the tax rate increases.
231. (b)
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(a)
According to rational expectations school, discretionary monetary and fiscal policy cannot be
used to stabilize the economy. Proponents of rational expectation argue that consumers and
business firms anticipate the implications of rise in government spending. Moneywage rate
and prices will rise, but output and employment will remain the same. So government can no
longer fool the people by increasing its spending during elections years. So the answer is (b).
84
Part I
232. (e) Monetarist opines that demand function for money is better determined than consumption
or investment function and hence they prefer monetary policy over fiscal policy. Fiscal policy
is ineffective because increase in public expenditure leads to decrease private expenditure.
(Crowding out)
a.
b.
c.
Above reasons shows that option a is true.

Not true, as this is also a Keynesian proposition .
Not true, as it is Keynesian economics which says so and hence demand for money is
determined by interest rate.
Crowding out is one of the important reasons for ineffectiveness of fiscal policy and
hence true.
Since, (a) and (d) are true, this is the correct option.
d.
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e.
233. (b)
School of rational expectation is based on the premise that people do not make
systematic forecasting errors. On an average their views about the future are correct and
not biased as they behave rationality. Hence the option is wrong.
b. Whenever central bank increases the money supply, according to rational expectations
theory, people realize that it is the cause of inflation. According workers and business
firms adjust wages and prices in response to the changes in money supply. Hence any
change in money supply only affects wages and prices. Hence this option is true as only
wages and prices are affected and not employment.
c. Since the people are assumed to behave rationally, any attempt by the monetary
authorities to increase employment will be anticipated by the firms. They accordingly
changes prices and wages. Hence wages are flexible and not rigid. Hence the option is
not true.
Business men anticipate the changes in money supply (which is the primary cause for
inflation) and as they are rational, change prices accordingly. The price are flexible and not
rigid. Hence the option is not true.
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Since (c) and (d) are not correct options, (e) cannot be the answer.
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234. (b)
a. The Laffer curve gives the relationship between tax revenues and tax rates. Hence not
correct option.
b. Philips curve depicts the relationship between the rate of change in price and the rate of
unemployment.
c. Aggregate supply curve gives the relationship between net national product that would
be supplied at general price level given constant expectations.
d. The LM curve signifies the money supply. So this option is not right
e. The IS curve shows that combination of interest rates and levels of output such that
planned spending equals income. Hence not true option.
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Economic Fluctuations, Unemployment and Inflation
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235. (d) Bank reserves increase rapidly in boom period; suffer a set back in recession and fall
rapidly during depression.
236. (a) Frictional unemployment is the unemployment caused by constant changes in the labor
market.
237. (c) Unemployment that arises when there is general downturn in business activity is known
as cyclical unemployment.
238. (d) Full employment is defined as the level of employment that results when the rate of
unemployment is normal.
239. (e) Natural rate of unemployment is influenced by the structure of workforce and by the
changes in public policy. The natural rate of unemployment increases when youthful workers
comprise a large proportion of the workforce because they change jobs and move in and out
of the employment often.
85
Macroeconomics
240. (e) When the actual rate of unemployment exceeds the natural rate of unemployment the
actual output of the economy will fall below its potential and consumption of goods
decreases.
241. (b) Unemployment that arises due to structural changes in the economy is called structural
unemployment. This arises when the regional or occupational pattern of job vacancies does
not match the pattern of workers availability and suitability.
242. (d) Inventory stocks will be very little in boom period whereas the stock levels will be very high
during depression. The reason is that during boom (recession) the consumption will be high
(low).
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243. (d) Disguised unemployment refers to a situation where more than the required number of
people are visibly occupied in some work contributing nothing to the output.
244. (c) In developing countries like India there is wide spread disguised unemployment in
agricultural sector.
245. (e) Stagflation is a period characterized by high inflation and high unemployment levels.
246. (c) Real interest rate is the nominal rate of interest minus the expected rate of inflation.
247. (d) Unemployment that arises due to structural changes in the economy is called structural
unemployment. This arises when the regional or occupational pattern of job vacancies does
not match the pattern of workers availability and suitability.
248. (b) During recessionary phase of business cycle the rate of unemployment increases rapidly
due to increasing reduction in consumption.
249. (a) Monetarists believe in the use of a stable growth rate for the money supply for the
economic development.
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250. (c) Philips curve shows the relationship between inflation rate and unemployment rate. Philips
curve indicates an inverse relationship between the rate of inflation and unemployment.
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251. (e) Bottlenecks refer to the obstacles in reaching full employment in the economy. Both (b)
and (c) act against achieving full employment.
252. (c)
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In the business cycles theory, after a business peak or boom, the economy enters contraction
stage. The sales of most businesses fall and real GNP of an economy grows at a slow pace.
There is a large number of unemployment in the labor market. This phase is otherwise known
as recession.
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(a) Is not the answer because the inventory stock increases gradually in recession.
(b) Is not the answer because business expectation will be pessimistic with cautious
decision-making.
(c) Is the answer because there is an underutilization of existing capacity in the economy.
(d) Is not the answer because bank credit starts falling in the recession phase of business
cycle.
(e) Is not the answer because there is a decline in the income levels of the people.
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253. (e)
Inflation is a serious problem on the part of the government worldwide. The effect of
inflation is ranging from redistribution of income and wealth of the society to the worsening
the balance of payments position of the country.
(a)
It is true statement that unanticipated inflation hurts the fixed income earners most.
Though their monetary income is constant, real income is reduced because of inflation.
(b) It is true statement that higher than expected inflation hurts creditors but benefits
debtors. Debtors repay the amount, which is fixed in nominal terms. The real values of
repayments in the future will decrease with an increase in inflation, leads to an increase
in the wealth of the debtors. On the other hand, the wealth of the creditors will decrease
with an increase in the rate of inflation.
(c)
86
It is a true statement that inflation creates inefficiency in the economy because people
spent lot of time to find a reasonable price.
Part I
(d) It is a true statement that inflation can lead to a misallocation of resources because
inflation misleads people to invest logically.
(e)
Is the answer because all the above statements are correct.
254. (e) In case of stagflation, there is stagnation as well as inflation exists in the economy.
There is a slowing down of economic activities occurs.
(a)
Is not the answer because deflation refers to a situation in which there is a decrease in
general level of prices in an economy that is sustained over a period of time
04
(b) Is not the answer because in the case of hyperinflation, price rise is very large and
accelerating.
Is not the answer because recession is characterized by the downturn in economic
activities in an economy.
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(c)
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(d) Is not the answer because there is a contraction of economic activities in the
depression period.
Is the answer because there is a stagnation combined with inflation prevails in the
economy in the period of stagflation.
255. (c)
The periodic upswings and down swings in the level of economic activity which forms
a regular pattern with an expansion of activity followed by a contraction ,succeded by
further expansion are referred to as business cycles. Each of the phases is characterized
by certain features.
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(e)
Mere existence of unemployment cannot be taken as an indicator of recession or

depression, as in a country like India, even though the economy is growing these is
unemployment. Hence not true.
b.
Price levels are only an indicator of purchasing power, which in turn is dependent on
income levels of the people also. Hence cannot be taken as primarily indicator of the
different phases of business cycles.
c.
By definition, a business cycle is a swing in total national output, income and

employment market by contraction or expansion in many sectors of the economy
changes in real GNP brings changes in prices, employment. Hence only the basis of
changes in real GDP different phases are classified. Hence real GDP is the correct
option.
d.
Changes in inventory level do give an indication about the different phases, but the
changes inventory level are as a result of changes in real GDP.
e.
Gross investment is dependent on future growth rate, which again based on estimation
of real GDP in future. Hence gross investment cannot be primarily indicator.
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256. (a) Stagflation refers to a situation where there is high unemployment and high inflation
occurs simultaneously.
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Statement (i) is true as stagflation refers to coexistence of stagnant output and high inflation.
Statement (ii) is false because during stagflation, there is no increase in output and hence the
output is stagnant. Therefore real GDP is not growing.
Statement (iii) is true because during stagflation, the output is stagnant, new employment
opportunities are not created and hence unemployment level is high.
Statement (iv) is false as the price are high and there is unemployment, the aggregate demand
tends to be low.
So the answer is (a).
257. (b)
a.
Zero unemployment refers to situation where there is no unemployment
87
Macroeconomics
b.
Natural rate of unemployment is the long run average of unemployment caused due to
frictional and structural changes in labour market. Full employment means that there is
certain amount of unemployment which is refered to as natural rate of unemployment.
Hence the correct option.
c.
During full employment, there still exists certain amount of unemployment and hence
cannot say that demand for labor is at the lowest . Hence not correct option.
d.
Supply of labor depends on population and has no relation with full employment. Hence
the option is not correct.
e.
Since (c) and (d) are not correct options, this is not true option.
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258. (c)
Frictional unemployment occurs when constant changes in the labour market lead to
unemployment. It occurs on account of imperfect information. Hence not correct option.
b.
Unemployment that arises due to general down turn in business activity is refered to as
cyclical unemployment. Hence not related to the output, not the correct option.
c.
Disguised unemployment occurs due to excess labour force depending on agriculture

sector. Some laborers are employed, but their contribution to production is zero. Hence
the correct option.
d.
Structural unemployment occurs due to structural changes in the economy, and such
people are not employed and hence there is no question of contribution to production.
Not correct option.
e.
Sectoral unemployment refers to unemployment that exists in any particular sector, for
example agricultural sector. Hence not correct option.
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259. (c) Cost-push inflation refers to increase in price as a result of the causes originating from the
supply side. The left ward shift of the supply curve occurs as a result of increase in the wage
level unmatched by the increase in the labour productivity, increase in the profit margins by
those who can exercise the market power and supply shocks.
Decrease in wages leads to decrease in cost of production and hence prices will reduce
if the producer passes on to the consumer.
b.
When the productivity of labour increase it leads to lowering the cost of production per
unit and hence the prices will decrease.
c.
As the cost of raw material increases it leads to increase in cost of production which
results in increases in prices. Hence this option is correct.
d.
Right ward shift in the supply curve occurs when there is a decrease in prices and hence
not the correct option.
e.
Finding of new raw material would lead to lower cost of raw material as the supply of
raw material has increased and hence lowers the prices.
88
Recessionary GDP gap signifies higher potential real GDP compared to realized real
GDP.
b.
Hyper inflationary situation refers to price rise is very large and accelerating. This
occurs when aggregate demand is more than aggregate supply. In case of recessionary
GDP gap, prices are falling. Hence not correct option.
c.
When these is necessionary GDP gap, it leads to realized GDP falling short of potential
GDP. Hence during prices will be falling and unemployment rate would increase. But
there will be high unemployment, which occurs only during depression.
d.
Natural rate of unemployment occurs when potential GDP is equal to realized GDP.
Which is not the case when there is recessionary GDP gap. Hence not the correct
option.
e.
Since (b) and (d) are not correct, this is not correct option.
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260. (a)
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a.
Part I

261. (b) The trade balance is the difference between merchandize exports and imports.
262. (d) The balance of payments always balances, therefore all entries in the BoP should sum to
zero.
263. (a) The current account records all transactions in merchandize and invisibles of the country
with the rest of the world.
04
264. (d) Inventories of foreign countries and gold that could be sold for dollars are held under the
official reserves account by central bank that they would sell in the market when there is an
excess demand for dollars. Conversely when there is excess supply of dollars they would buy
up the dollars.
04
20
04
265. (a) The current account records all transactions in merchandize and invisible with the rest of
the world. If the BoP on current account is deficit, it implies that imports of goods and
services are more than that of exports.
M
AC
266. (b) If a foreign supplier sells the goods in the domestic market at a price less than that of the
goods supplied by the domestic supplier, it is called dumping.
ef
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o.
267. (a) The items included under the invisibles of the current account are investment income,
travel, transportation, insurance, and other miscellaneous items.
27
-4
268. (d) Transfer of assets or goods to a country without any consideration or return are called
international transfers.
02
269. (c) BoP is in deficit when both current account and capital account balances are in deficit.
1-
31
4-
270. (a) When current account balance is not balanced by the capital account surplus the foreign
exchange reserves will decline and it causes a contraction in the money supply.
.IS
BN
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271. (c) Receipts in cash or kind without a quid pro quo are called transfer of payments, i.e. they
are made for no return service, i.e. unilateral.
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272. (b) The foreign exchange reserves of a country apart from serving to balance the BoP
statement of an economy have a strong impact on the monetary policy pursued by the central
bank in the domestic sector. When foreign exchange reserves contracts, the money supply in
the economy decreases.
Pr
es
s.
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ht
273. (d) Dividends earned on portfolio investments come under the head of invisibles in current
account, whereas the other options given come under the capital account of the BoP.
274. (d) Preparation of BoP statement is based on double-entry system of book keeping. Hence, all
debt items should equal credit items, and the balance is zero.
Is not the answer because all entries in the balance of payments statement is not
collectively sum to GDP of the country.
b.
collectively sum to GNP of the country
c.
collectively sum to Foreign exchange reserves of the country
20
04
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a.
d.
Is the answer because all entries in the balance of payments statement is collectively
sum to zero.
collectively sum to Exports of the country.
275. (d) All the transactions which effect the asset or liability position of a country are put under
Capital account of the Balance of Payments statement. Other transactions are put under the
Current account.
a.
Is not the answer. Foreign Direct Investment increase the liability of a country, hence
falls under Capital Account.
b.
Is not the answer. Portfolio Investments increase the liability of a country, hence falls
under Capital Account.
89
Macroeconomics
c.
Is not the answer. External Commercial Borrowings increase the liability of a country,
hence falls under Capital Account.
d.
Is the answer. Dividends on portfolio investments are an income earned by a factor of

production (capital). This is included in Income under Invisibles in Current Account.
Is not the answer. External Assistance increases the liability of a country, hence falls
under Capital Account.

Debt
04
04
276. (a) The tax and expenditure policies together constitute the fiscal policy of the government.
Customs duty is an instrument of fiscal policy.
04
20
277. (c) The increase in net RBI credit to the central government, comprising the net increase in
the holdings of treasury bills of the RBI and its contribution to the market borrowings of the
government is called monetized deficit.
defense expenditure
c.
subsidies.
o.
b.
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interest payments
a.
M
AC
278. (e) The major components of non-plan expenditure are:
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27
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279. (d) Primary deficit is calculated by deducting interest payments of the government from the
gross fiscal deficit.
280. (a) Apart from the tax revenue the other important areas of resource mobilization for the
government are non-tax revenues which include profits from PSUs.
281. (e) Large fiscal deficits will have implications upon money supply, growth, inflation and for
the access to resources for private investment.
282. (c) SLR refers to the minimum percentage of the total liquid assets that banks have to
maintain with themselves. Fiscal deficit is obtained when total receipts excluding government
borrowings are subtracted from total expenditure. So change in SLR has no effect on fiscal
deficit.
Pr
es
284. (e) Self-explanatory.
s.
Al
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283. (e) Monetized deficit is the increase in net RBI credit to the Central Government, comprising
the net increase in the holdings of Treasury Bills of the RBI and the contribution to the
market borrowings of the Government.
ve
rs
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285. (e) Gross fiscal deficit is computed by deducting total receipts excluding government
borrowings from the total expenditure.
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ni
286. (b) Mandatory wage price guidelines maintain the full employment and keep the inflation
under control.
fa
287. (c) Primary deficit = Fiscal deficit Interest payment.
Th
e
Ic
288. (a) Y = C + I + G + X
20
04
Y = a + b(Yd) + I + G + X
Where Yd = Y T and T = tY
Thus, an increase in taxes decreases the income. But an equal increase in government
expenditure increases the income greatly because of multiplier effect. So GDP increases.
289. (b) An increase in savings will not make any changes in current output.
290. (a) Installing a progressive income tax would have no effect on the Keynesian multiplier.
291. (e) Equilibrium income will increase by the amount of increase in government expenditure if
the multiplier is one. So MPC is equal to the investment income ratio.
292. (a) When the government spending increases and/or the tax rate decreases, an increase in the
aggregate demand (AD) takes place, which in turn leads to increase in the equilibrium real
GDP.
90
Part I
293. (d) Government borrowing to finance large deficits increases the demand for loanable funds,
which puts an upward pressure on interest rates in the market.
294. (b)
If somebody buys National Small Saving Certificate, it increases in the other liabilities of the
government.
(a)
Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
increase government borrowings.
(b) Is the answer because if Mr.X buys a National Small Saving Certificate, it will increase
in the other liabilities of the government.
increase in forex reserves.
20
04
04
(c)
04
(d) Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
increase government revenue.
decrease government liability.
o.
M
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(e)
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295. (c)
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Every economy goes through cyclical fluctuations in output, employment and prices. This
will have an automatic impact on certain government expenditures and revenues. The
changes in the government spending and revenues that results automatically as the economy
fluctuates are called non-discretionary fiscal policy. Automatic stabilizers are features of the
government budget that automatically adjust net taxes to stabilize aggregate demand as the
economy expands or contracts.
Is not the answer because an automatic stabilizer is not a mechanism in the stock market
that automatically cause stock market gains to be cancelled out by losses.
.IS
BN
(a)
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(b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms,
which automatically bring the economy out of a recession.
Is the answer because automatic stabilizer refers to government revenues and
expenditures that change automatically in response to changes in economic activity.
When the economy is in a contraction phase, these stabilizers increase transfer
payments and reduce tax collections in order to stimulate aggregate demand. On the
other hand, when the economy begins to expand, the automatic stabilizers increase tax
collections and reduce transfer payments in order to restrain growth in the aggregate
demand.
ve
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(c)
ni
(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.
iU
296. (a)
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Fiscal policy refers to policies dealing with taxes and government expenditure including
transfer payments.
20
04
(a)
Is the answer because when the government reduces taxes or raises spending to get the
economy out of a recession, is a case of fiscal policy measure.
(b) Is not the answer because when the central bank changes the money supply to affect the
price level, interest rates and exchange rate , it is a monetary policy.
(c)
Is not the answer because when the government restricts imports and stimulates exports;
it is a case of EXIM (Export-Import) policy.
(d) Is not the answer because both (a) and (b) cannot be the answer.
(e)
Is not the answer because both (a) and (c) cannot be the answer.
91
Macroeconomics
297. (a)
When the government monetizes part of its deficit, it is an increase in net RBI credit to the
government, comprising the net increase in the holdings of treasury bills of the RBI and its
contribution to the market borrowings of the government. To meet the needs of the
government, the RBI prints more money. This will lead to excess money supply in the
economy.
(a)
Is the answer because money supply in the economy increases when the government
monetizes part of its deficit.
04
(b) Is not the answer because when there is an excess money supply, interest rate will
decline.
Is not the answer because when the government monetizes part of its deficit, primary
deficit will decrease. Primary deficit is calculated by deducting the interest payments of
the government from the gross fiscal deficit.
04
20
04
(c)
M
AC
(d) Is not the answer because when the government monetizes part of its deficit, public debt
will decrease.
Is not the answer because when the government monetizes part of its deficit, revenue
deficit will increase. Revenue deficit is the difference between governments revenue
expenditure and revenue receipts.
ef
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(e)
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298. (e)
02
27
If a government has a surplus budget, and the government repays its past debts using its
surplus budget, public debt will be falling.
Is not the answer because if a government is running surplus in its budget, public debt
may not be rising.
1-
31
4-
(a)
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(b) Is not the answer because if a government is running surplus in its budget, public debt
may not be falling.
Is not the answer because if a government is running surplus in its budget, public debt
may not be constant.
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(c)
ht
re
(d) Is not the answer because if a government is running surplus in its budget, public debt
may not be falling if there are tax cuts.
Is the answer because if a government is running surplus in its budget, public debt will
be falling if the government uses the surplus to repay its past debts.
s.
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(e)
Pr
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299. (b)
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In India, personal taxes is an example of progressive tax system. Progressive tax system
implies that higher the level of income, higher will be the volume of tax burden, represented
as a percentage of the total income.
Is not the answer because personal tax is not a proportional tax system. In proportional
tax systems, the tax imposed is of a particular percent of income irrespective of his
income level.
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(a)
20
04
Th
e
(b) Is the answer because personal taxes is an example of progressive tax system.
(c)
Is not the answer because personal tax is not a direct tax system.
(d) Is not the answer because personal tax is not a value added tax system. In value added
tax system, the tax is on the value added at each stage.
(e)
Is not the answer because personal tax is not a regressive tax system. In regressive tax
system, people with lower levels of income are imposed with higher taxes as a
proportion of their income.
300. (c) Monetized deficit refers to increase in net RBI credit to the Central Government,
comprising the net increase in the holdings of T-bills of the RBI and its contribution to the
market borrowings of the government. Fiscal deficit = Borrowings and liabilities of the
Central Government and primary deficit = Fiscal deficit interest payments.
a.
92
Is not the answer because monetized deficit does not refer fiscal deficit minus interest
payments.
Part I
Is not the answer because monetized deficit does not refer borrowings and other
liabilities of the Central Government.
c. Is the answer because monetized deficit refers Increase in the net RBI credit to the
Central Government.
d. Is not the answer because monetized deficit does not refer fiscal deficit minus Primary
deficit.
e. Is not the answer because monetized deficit does not refer RBIs credit to the
commercial banks.
301. (a) Government gets its revenue from two sources, i.e. tax revenue and non-tax revenue.
Non-tax revenue includes profits from public sector units, interest earned on loans etc.
04
b.
Current year receipts of the government are classified under revenue receipts. Profits
from public sector units re the returns on investments by the government. Hence it
represents current income and hence part of revenue receipts of the government.
b.
Capital receipts refer to recovery of loans, borrowing and other liabilities. It does not
include current earnings of the government from public sector units. Hence profits are
not included.
c.
Monetized receipts.
d.
Planned expenditure refers to the outflow from the government, as the government is
spending money. Whereas in case of profits from public sector units they are inflows,
hence cannot be part of planned expenditure.
e.
Fiscal deficit measures the overall borrowings required to finance government

expenditure. Hence profits are taken as part of fiscal deficit.
31
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04
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04
a.
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1-
302. (b)
Progressive tax system refers to imposing more tax on people with greater income. As
income increases, tax rate also increases. Hence more tax is imposed on higher income
people. This option is not true
b. When more tax is imposed on lower income groups it is called regressive tax.
d. When tax imposed is of a particular percent of income irrespective of his income slab, is
known as proportional tax. Hence a poor person pays less tax as his income is less.
Hence not correct option.
d, e Customs and value added tax are indirect taxes, where as what is referred to under the is
with respect to the direct tax i.e. income tax. Hence cannot be correct answer.
303. (a) Automatic stabilizers are features of the government budget that automatically adjust net
taxes to stabilize aggregate demand as the economy expands or contracts.
a. By definition this option is true.
b. Lagging indicators refer to the time gap between the monetary policy changes and their
impact on the economy. They are not related to the fiscal policy of the government.
c. National Income aggregates are only indicators of the performance of the economy.
d , e. Real factors and growth variables are not related to fiscal policy.
Th
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Pr
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BN
a.
20
04

304. (c) A reduction in the reserve ratio by the Central Bank enables the commercial banks to lend
more money, which lead to an increase in money supply in the economy.
305. (b) To regulate the credit creating capacity of the commercial banks, the central bank
undertakes open market operations. An open market purchase (sale) is expansionary
(contractionary) in its effect from the point of view of credit creation.
306. (d) Loose monetary policy increases the money supply. Due to increased money supply in the
market, the interest rates will come down in the short run.
307. (d) Open market purchase causes more money to come into the circulation and thereby
increases the money supply. This in turn bring downs interest rates in the market.
93
Macroeconomics
04
308. (a) Sale of government securities in the open market reduces the money supply, which in turn
brings down inflation in the economy.
309. (c) Contractionary policies are aimed at reducing money supply in the economy. Increasing
the refinance limits is an expansionary policy, as it increases money supply in the market.
310. (c) The acts of Central Bank aimed at correcting the imbalances created by changes in
foreign exchange reserves is referred to as sterilization. If RBI wants to sterilize the inflow
of foreign exchange, it would conduct an open market sale of securities, which helps in
reducing the increased money supply in the economy.
311. (e) The excess of Gross Domestic Capital formation over Gross Domestic Savings is
financed by borrowing from the rest of the world. This shows a current account deficit in the
balance of payments. Thus
M
AC
04
20
04
GDCF = GDS + Deficit on Current a/c

Current a/c deficit = 3,500 3,000 = 200
Alternatively, GDCF = GDS + Foreign savings (in the form of foreign investment).
Therefore, foreign savings inflow is equal to 200.
Trade and Exchange Rate Policies
ef
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312. (a) Trade policy of any country which has trade relations with other countries constitutes
both import policy and export policy. While the former tries to reduce the expenditure on
imports, the latter aims at increasing the export earnings.
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313. (d) Only commercial banks will be authorized to trade in foreign currencies. Permitted
commercial banks act as foreign currency dealers and are regulated by FEDAI.
314. (a) In an economy, the high-powered money is the aggregate of monetary liabilities of the
central bank and government money. The foreign exchange reserves are the asset of the
central bank. When the foreign exchange reserves increases, the monetary liabilities also
increase. This in turn increases the high-powered money in the economy and thereby the
money supply. If the economy is already affected by inflation, the central bank must step in
to curb this expansion of money supply by either contracting its lending its lending to the
banking systems (by increasing the discount rate) or by open market operations (sale of
government securities) or by increasing the cash reserve ratios of the commercial bank.
(a) Is the answer because the Reserve Bank of India increase CRR to correct the
imbalances created by changes in foreign exchange reserve.
(b) Is not the answer because RBI would not decrease CRR. It will not help in correcting
the imbalances created by changes in foreign exchange reserve.
(c) Is not the answer because due to increase in foreign exchange reserves, RBI increases
the discount rate.
(d) Is not the answer because RBI checks the expansion of money supply by open market
operations, i.e. sale of government securities.
20
04
Th
e
Ic
fa
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315. (d)
An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy
shifts the LM curve to the right. It will result in a higher level of output, but the level of
interest rate is dependent on the relative magnitude of fiscal and monetary policies
a. Is not the answer, because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a lower interest rate.
b. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a higher interest rate.
c. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but not a lower interest rate.
d. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but we cannot say that it results in a
higher interest rate.
e. Is the answer because an expansionary fiscal policy combined with a liberal monetary
policy result in higher level of output, but the level of output, but the level of interest
rate is dependent on the relative magnitude of fiscal and monetary policies.
94
Part I
316. (b) If the central bank does not impose any reserve ratio, the commercial bank need not keep
on deposit with the Reserve Bank certain amount of funds equal to a specified percentage of
its own deposit liabilities. Then the banking sector can create unlimited money supply.
(a)
Is not the answer because without the imposition of reserve ratio, the banking system
can affect the supply of money through credit creation.
(b) Is the answer because if the central bank does not impose any reserve ratio, the banking
sector can create unlimited money supply.
(c)
Is not the answer because without reserve ratio, the lending capacity of banks would not
narrow down to zero.
20
04
04
(d) Is not the answer because if the central bank does not impose any reserve ratio, a rupee
deposited in a bank does not reduce the money supply in the economy by one rupee.
Is not the answer because if the central bank does not impose any reserve ratio, money
supply in the economy will not be equivalent to high-powered money.
Money supply = H (1+ Cu / Cu + r)
ef
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o.
Where, H = Monetary Liabilities of Central Bank + Government Money.
M
AC
04
(e)
Cu = Currency-deposit ratio
27
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r = Cash reserve ratio.
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4-
02
317. (d) Outside lag is the duration involved for output and employment to respond to changes of
the implemented of policies. Taxes has the least outside lag.
Is not the answer because cash reserve ratio has not the least outside lag.
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(a)
BN
(b) Is not the answer because bank rate has not the least outside lag.
Is not the answer because repo rate has not the least outside lag.
ed
.IS
(c)
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(d) Is the answer because tax has the least outside lag.
Is not the answer because open market operation has not the least outside lag.
re
(e)
s.
Al
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318. (b) Open market operations refer to purchase and sale of securities by the central bank. When
the central bank purchases securities it increases the reserve base of the commercial banks
and hence leads to multiple expansions of credit and deposits.
The increase in the monetary base leads to more credit creation and hence leads to
increase in output that is aggregate supply.
b.
As the money supply increases due to open market purchases, in short run production
cannot adjust to the increased demand which is a result of higher money supply. The
prices tend to increase which results in inflation. Hence b is the correct option.
c.
The increase in money supply leads to a downward pressure on interest rate and the
interest rates will in fact decrease.
20
04
Th
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Pr
es
a.
d.
Aggregate demand will increase as the increased money supply will lead to decrease in
interest rates which will increase the investment demand and consumption demand.
e.
Output increases as explained in option (a).
319. (c) The lags that are given below basically refers to lags in the monetary policy
a.
Recognition lag refers to the time gap between the requirement of an action and its
actual initiation. Hence not the correct option.
b.
Administrative lag refers to the time gap between recognition lag and the
implementation of monetary policy. Hence not the correct option.
c.
As the monetary makes some changes, it takes some time for the firms and to respond
with changes in output and employment. Such time gap is refered to as outside lag.
Hence (c) is the correct option.
95
Macroeconomics
d.
Inside lag refers to the time gap between necessity of an action to be taken by central
bank and the action actually undertake. Hence not correct option.
e.
The difference between inside and outside lag is referred to as intermediate lag.
Whereas the response of the public due to changes in interest rate is part of outside lag.
Hence this option is not correct.
04
04
320. (e) Bank rate is the minimum rate at which the central bank is prepared to discount or
rediscount the bills of exchange brought to it by the members of the money market. It is also
the interest rate at which the central bank provides loans to the commercial bank when they
borrow money from central bank.
04
20
Hence by definition option (e) is correct.
Is not the answer because bank rate does not mean the rate of interest on inter-bank
loans
b.
Is not the answer because bank rate does not mean the rate of interest charged by banks
on borrowers
c.
Is not the answer because bank rate does not mean the rate of interest paid by banks to
depositors
d.
Is not the answer because bank rate does not mean the rate of interest charged by banks
for loans given to the central bank of the country
e.
Is the answer because bank rate means the rate of interest charged by the central bank of
a country on its loans to other commercial banks.
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a.
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321. (b) There are two stages in the transmission mechanism. In the first stage when there is an
increase in real money supply, portfolio disequilibrium occurs i.e people are holding more
money than they want. They try to get rid of excess money they are holding by buying financial
assets. This results in increase in prices of financial assets and hence the interest rates fall.
s.
Al
lr
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ht
re
In the second stage the changes in the interest rate affects aggregate demand. The fall in the
interest rate leads to increase in investment demand as the cost of borrowing has decreased.
Hence the sequence of events is portfolio disequilibrium, increases in prices of assets, fall in
interest rate and then increase in investment.
Pr
es
The correct sequence is given by option (b).
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ni
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322. (c) Since the economy is already under inflation, any increase in money supply has to be
curtailed by the monetary authorities so as to control any further increase in prices. The
increase in foreign exchange reserves leads to increase in monetary base and hence the
money supply in the economy increases.
A decrease in discount rate would result in increased borrowings by the commercial
banks from the central bank. This will increase the money supply, hence not the correct
option.
b.
When the government buys securities from the people, the money with the people will
increase, the money supply will increase and prices also will rise. Hence not the correct
option.
c.
The central bank by increasing the cash reserve ratio reduces the credit creation capacity
of the banking system. This results in decrease in money supply which will compensate
the increase in the money supply due to foreign exchange inflow. Hence this option is
correct.
d.
Not a correct answer it is a fiscal instrument.
e.
Increasing government spending is also a fiscal policy instruments.
20
04
Th
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Ic
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a.
96
Part I
Economic Growth Development and Planning

a.
323. (e)
Low managerial efficiency leads decrease in productivity, this .would mean that
more input (capital) is required to produce an unit of output. Hence ICOR
increases.
As the production process becomes complicated, i.e. complex leads to time
consuming procedures which leads time over runs. This reduces productivity and
hence ICOR increases.
Since the existing capital is less productive, it means the returns on the capital are
also low and hence ICOR will be high.
Inadequate delegation of powers lead to delay in decision making which result in
cost and time over runs. This increased costs leads to more capital inputs required
to produce an unit of output i.e. higher ICOR.
b.
20
04
04
c.
M
AC
04
d.
As the productivity of labor increase, less units of input will be required to produce
one unit of output. Hence ICOR will decrease Hence this option is correct.
20
04
Th
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e.
97
Part II: Problems

Price (Pio) 1985-86
Rs.7.5/kg
Rs.5/kg
Rs.15/mtr
Rs.0.50/unit
Price (Pit) 1995-96

9.0/kg
7/kg
20/mtr
0.75/unit
e.
132.9.
04
132.25
d.
133.5
M
AC
c.
o.
134.5
ef
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130.7
b.
a.
20
The value of the Laspeyers consumer, price index is
04
Qty (Qio) 1985-86

10 kg
20 kg
10 mtr
100 unit
Item
Pulses
Rice
Cotton
Electricity
04
The following information is provided.
1.
27
02
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.IS
BN
Price 1991-92
Rs.10/kg
Rs.8/kg
Rs.6/ltr
Rs.20/mtr
Rs.400
31
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Quantity 1991-92
20 kg
10 kg
40 ltrs
15 mtr
Single bedroom flat
:8
Item
Rice
Wheat
Milk
Cotton cloth
Housing
-4
2.
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If the price of rice and milk in 1996-97 increased by 20% and 30% respectively, what would
be the Retail Price Index for the year 1996-97?
ty
Pr
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s.
Al
lr
ig
ht
re
a. 107.40.
b. 108.50.
c. 108.70.
d. 108.95.
e. 109.30.
Based on the following information answer the questions 3 to 6.
fa
iU
ni
ve
rs
i
Year Nominal GNP (Core)

2001-02
2,500
2002-03
3,200
If the GNP deflator in 2000-01 is 100, then the real GNP of 2001-02 would be:
a. 2031.83
b. 2057.48
c. 2183.83
d. 2083.33
e. 2103.33.
The real GNP of 2002-03 is:
a. 2,207.00
b. 2,214.70
c. 2,215.50
d. 2,214.60
e. 2,213.20.
20
04
Th
e
Ic
3.
4.
GNP Deflator
120
145
Part-II
04
20
04
B
6.
04
The growth rate of real GNP from 2001-2002 to 2002-03 is:

a. 6%
b. 5.9%
c. 5.6%
d. 5.3%
e. 6.1%.
The inflation rate in 2002-03 in relation to 2001-02 is:
a. 19.61%
b. 20.38%
c. 20.83%
d. 21.12%
e. 19.80%.
5.
GNP Deflator
2,500
100
2002-03
3,200
159.50
R
-4
27
02
431
1:8
BN
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
8.
o.
2001-02
The real GNP in 2001-02 is:

a. 2,018
b. 2,106
c. 2,001
d. 2,006
e. 2,011.
The real GNP for 2002-03 is:
a. 2,500
b. 2,550
e. 2,450
d. 2,600
e. 2,585.
The inflation rate in relation to 2001-02 is:
a. 58.6%
b. 59.8%
c. 58.9%
d. 58.10%
e. 59.5%.
7.
M
AC
Nominal GNP (Core)
ef
.N
Year
fa
iU
ni
ve
rs
i
ty
Pr
es
9.
Th
e
Ic
10. The following particulars are provided, the GDP of factor cost would be:
20
04
Factor Incomes
Paid to domestic residents

Paid to foreign residents
Retained profit
Corporate profit tax
Depreciation
a.
b.
c.
d.
e.
Rs. (in crore)

85
15
10
5
10
135
120
125
105
110.
99
Macroeconomics
800
Subsidies
400
Factor income paid abroad
800
Factor income received from abroad
900
200
Indirect taxes
450
Depreciation
350
M
AC
Corporate tax
04
1,000
20
Personal income tax
04
5,000
GNP at market price
04
Rs.
Particulars
e.
4,850.
ef
.N
4,900
d.
-4
4,550
27
4,950
c.
02
b.
4-
4,750
31
a.
o.
11. GDP at Factor Cost is:
4,600
e.
4,950.
:8
d.
BN
4,850
.IS
c.
ed
4,450
se
rv
b.
re
4,500
a.
1-
12. National Income is:
c.
2,600
d.
4,100
e.
4,000.
s.
Al
3,900
Pr
es
b.
ty
3,800
iU
ni
ve
rs
i
a.
lr
ig
ht
13. The Personal Disposable Income is:
20
04
Th
e
Ic
fa
14. In an economy:
GDP at FC
Depreciation
GNP at Market price

Indirect taxes
(Rs.)
80,000
4,000
95,000
5,000
The Net Factor Income from Abroad is:
100
a.
15,000
b.
10,000
e.
15,000
d.
12,500
e.
12,000.
Part-II
15.
Dr.
Cr.
(Rs.) in Crore
250
20
20
50
20
320
Wages & salaries

Dividends
Retained profits
Profit tax
Excise tax
04
Production Account
Rs. (in crore)
200
Sales to households
40
Fixed investment
50
Net changes in inventories
10
Exports
20
Imports
320
250
e.
280.
20
d.
04
260
c.
290
M
AC
b.
o.
300
ef
.N
a.
04
The GDP at Factor Cost is:

Production Account
Rs.
(in crore)
250
Sales to households
40
Fixed investment
30
40
Exports
30
Imports
10
400
Cr.
31
4-
02
27
-4
Dr.
400
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Wages
Dividends paid to residents
Dividends paid abroad
Retained profits
Profit tax
Excise tax
Rs.
(in crore)
280
30
50
50
10
ty
Pr
es
s.
Al
Dr.
Ic
fa
iU
ni
ve
rs
i
Export of goods
Foreign Account
Rs.
(in crore)
50
Imports
60
Surplus
110
Cr.
Rs.
(in crore)
10
30
70
110
20
04
Th
e
16. GDP at factor cost is:

a. 360
b. 320
c. 350
d. 330
e. 390.
17. Gross National Product factor cost is:
a. 420
b. 360
c. 390
d. 430
e. 300.
101
Macroeconomics
18. GNP at market price is:

a.
420
b.
410
c.
430
d.
390
e.
370.
19. The following informations are provided.
Corporate Profit Tax
Depreciation
40
205.
ef
.N
e.
225
-4
d.
27
230
02
c.
4-
210
31
b.
1-
195
:8
a.
o.
NDP at factor cost is:
04
20
20
Retained Profits
04
25
185
Factor Income paid to Foreign Residents
Factor Income paid to Domestic Residents
04
Rs. in crore
M
AC
Factor Incomes
BN

Dr.
.IS
Production Account
Rs.
(in crore)
se
rv
ed
Rs.
(in crore)
Ic
Th
e
20
04
20. GDP at Market Price is:
102
ht
lr
300
Sales to households
250
48
Fixed investment
90
32
60
50
Exports
60
30
Imports
20
20
480
480
Foreign Account
Cr.
Rs.
Rs.
(in crore)
(in crore)
Export of goods
60
Imports
20
60
32
Surplus
68
120
120
fa
Dr.
iU
ni
ve
rs
i
Excise Tax
ty
Profit Tax
Pr
es
Retained Profits
s.
Al
ig
Dividends paid to residents
re
Wages
Cr.
a.
380
b.
430
c.
410
d.
480
e.
460.
Part-II
21. GNP at Market Price is:

a.
508
b.
480
c.
390
d.
430
e.
460.
Based on the following information answer the questions 22 to 23
04
Price Level
67.50
121.01
04
Nominal GNP
55,000
1,35,000
20
Year
2001
2003
e.
81,435.
81,491
d.
M
AC
81,543
o.
c.
ef
.N
81,698
81,481
b.
-4
a.
04
22. The real GNP for the year 2001 is:
1,12,682
d.
1,11,674
e.
1,11,492.
02
431
ed
c.
1-
1,11,561
:8
b.
BN
1,12,561
.IS
a.
27
23. The real GNP for the year 2003 is:
se
rv
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Particulars
National Income
Government purchase
Consumption
Net investment
Gross investment
GNP
Personal tax and non-tax payment
Transfer payments
Net interest
Government budget surplus
Dividends
Proprietors income and rental
income of persons
Wages and Salaries
Rs. in crores
3,850
930
3,000
300
800
4,800
600
510
120
30
100
320
2,920
24. Net Indirect Taxes is:

a.
465
b.
445
c.
450
d.
476
e.
480.
103
Macroeconomics
27
-4
ef
.N
o.
M
AC
04
20
04
04
25. The value taxes Transfers is:

a. 930
b. 980
c. 910
d. 880
e. 960.
26. Personal Income is:
a. 2,920
b. 3,340
c. 3,460
d. 3,560
e. 3,970.
27. The Net Exports is:
a. 45
b. 70
c. 50
d. 48
e. 60.
4-
02

Rs.
(in crore)
450
1,200
7,200
4,500
900
780
180
1,440
5,775
45
150
480
4,380
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
BN
.IS
ed
se
rv
re
Net investment
Gross investment
GNP
Consumption
Personal tax and non-tax payment
Transfer payments
Net interest
Government purchases
National Income
Government Budget Surplus
Dividends
Proprietors Income
Wages
:8
1-
31
Particulars
Ic
28. The Corporate Profit is:

785
b.
735
c.
760
d.
745
e.
720.
20
04
Th
e
a.
29. NNP is:
104
a.
6,450
b.
6,750
c.
6,300
d.
6,335
e.
6,400.
Part-II
30. Personal Disposable Income is:

a.
5,735
b.
5,285
c.
5,070
d.
5,175
e.
5,090.
570
d.
565
e.
550.
04
c.
20
590
04
b.
580
a.
04
31. Personal Savings is:
3,000
Depreciation
4,000
-4
27
4,000
02
4-
3,800
:8
1-
Indirect Taxes
800
31
Direct Taxes
o.
Rs. in crore
ef
.N
Particulars
M
AC
32. The following informations are given.
350
BN
Surplus
2,000
.IS
Subsidies
22,550.
ht
e.
ig
22,650
lr
d.
s.
Al
22,800
Pr
es
c.
ty
22,950
ve
rs
i
22,600
b.
re
GDP at Market Price is:

a.
16,000
se
rv
ed
National Income
ni
fa
iU
Particulars
Ic
NDP at market price
16,939
Net factor income from abroad
46
Depreciation
900
Subsidies
354
Th
e
20
04
Rs. in crore
Indirect Taxes
2,136
33. NDP at Factor Cost is:

a.
15,517
b.
15,751
c.
15,157
d.
15,215
e.
15,257.
105
Macroeconomics
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04

a. 15,111
b. 15,900
c. 16,110
d. 16,011
e. 15,985.
35. GNP at Factor Cost is:
a. 16,110
b. 16,280
c. 16,115
d. 16,011
e. 16,105.
36. In an economy which has a capital output ratio of 4:1, population is expected to grow at 2.1%
p.a. If the planners fix a target growth rate of 5% p.a. in per capita real GDP, would be the
rate of investment (i.e., investment as percentage of GDP) required to achieve the target,
(You can ignore depreciation.)
a. 29%
b. 28.75%
c. 28.25%
d. 29.5%
e. 28.4%.
BN
:8
ed
.IS
Particulars
se
rv
GDP at market price
re
Corporate Income Tax
ig
ht
Personal Income Tax
1,200
Pr
es
ty
ve
rs
i
ni
Indirect Taxes
fa
iU
Depreciation
Ic

a.
6,300
b.
6,000
c.
6,450
d.
6,200
e.
6,600.
Th
e
20
04
475
Factor Income Paid Abroad

Undistributed Profit
900
1,500
106
6,000
1,200
s.
Al
lr
Subsidies
Million of Currency
Units
a.
5,725
b.
5,475
c.
5,600
d.
5,275
e.
5,550.
225
900
600
Part-II
39. Personal Disposable Income is:

a.
3,200
b.
2,980
c.
2,950
d.
2,840
e.
2,700.

The following is the information drawn from the National Income Account for an economy.
04
20
04
B
W
M
AC
o.
GNP
Gross investment
Net investment
Consumption
Government Spending
04
Amount
Rs. crore
4,850
854
310
3,095
968
ef
.N
Particulars
e.
4,600.
-4
27
02
4,446
4-
4,544
d.
31
c.
1-
4,306
:8
b.
41. The Net Exports for the economy is:

77
b.
46
c.
67
d.
67
e.
76.
s.
Al
lr
ig
ht
re
se
rv
ed
a.
BN
4,850
.IS
a.
40. The NNP is:
ve
rs
i
ty
Pr
es
42. The following is the data relating to the national accounts of an economy for the year 1995 in
million units of currency.
Particulars
Million units of currency
iU
ni
Capital Consumption Allowance
fa
Personal Consumption Spending
12,500.00
500.00
250.00
Ic
Th
e
20
04
1,000.00
Net Exports
25.00
Dividends
750.00
Rent
1000.0
Interest
500.00
Indirect business taxes

Gross private domestic investment
Compensation to employees
Government spending
Proprietors Income
1,250.00
550.00
8,487.50
912.50
1,250.00
107
Macroeconomics
o.
M
AC
04
20
04
04
The Gross National Product (GNP) using income method is:

a. 13,897.50
b. 13,998.50
c. 13,870.50
d. 13,790.50
e. 13,987.50.
43. In a hypothetical economy, population is expected to grow at 1.9% p.a. Planners in a target
per capita GDP growth of 6% p.a. If the capital output ratio is 4:1, assuming no depreciation,
what should be the rate of investment (i.e., investment as a percentage of GDP)
approximately?
a. 30.9%.
b. 31.8%.
c. 31.1%.
d. 30.9%.
e. 31.6%.
ef
.N
Based on the following information answer the questions 44 and 45.
1-
31
4-
02
27
-4
An economy consists of production sector and household sector. The production sector is
made up of three Corporations Rose Corporation, Perfume Corporation, and the Bottle
Corporation. In the year 1995, Rose Corporation paid wages of Rs.2,250 to workers who
gathered roses. It sold Rs.1,650 (labor cost value) of these roses to the Perfume Corporation,
for which the latter paid Rs.1,950. The Rose Corporation added the remainder of its output to
its inventories.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
The Perfume Corporation paid Rs.4,500 to its workers to convert the roses into perfume. It
sold Rs.6,750 (Cost for Perfume Corporation) to the Bottle Corporation for Rs.7,200. To
achieve this level of sales, Perfume Corporation drew from its opening inventory. The Bottle
Corporation paid Rs.750 as wages. It increased its inventories by Rs.2,259 (at cost to it) and
sold the rest of perfume to households for Rs.7,875. All the corporations fully distributed
their profits.
44. In the production account, the net investment in the stock would be:
a. 475
b. 525
c. 575
d. 600
e. 610.
45. The value added GDP of the economy is:
a. 7,650
b. 7,950
c. 8,400
d. 8,200
e. 8,550.
From the national accounts for the year 2000-01 at current prices, we have the following
information. (All figures in Rs. crore).
84,686
Depreciation
4,957
Subsidies
1,772
Indirect Taxes
108
233
10,689
Part-II
-4
ef
.N
o.
M
AC
04
20
04
04
46. NNP at Market Price is:

a. 84,543
b. 84,342
c. 84,686
d. 84,233
e. 84,453.
a. 88,550
b. 88,342
c. 89,410
d. 90,200
e. 87,475.
48. NDP at Factor Cost is:
a. 75,769
b. 80,493
c. 84,686
d. 78,745
e. 84,453.
27
31
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
50.
Pr
es
s.
Al
lr
ig
ht
re
49.
se
rv
ed
.IS
BN
:8
1-
GNP at Factor Cost

95,023
Indirect taxes
14,723
NDP at market price
1,00,422
NNP at market price
1,00,575
GNP at market prices
1,07,226
The value of Depreciation is:
a. 6,550
b. 6,740
c. 6,651
d. 6,680
e. 6,600.
The value of Net Factor Income from abroad is:
a. 175
b. 184
c. 150
d. 164
e. 153.
The value of Subsidies is:
a. 2,520
b. 2,350
c. 2,560
d. 2,480
e. 2,620.
Value of NDP at Factor Cost is:
a. 88,560
b. 89,153
c. 88,219
d. 88,198
e. 88,225.
4-
02
The figures given below pertain to the year 2000-01. (All figures in Rs. crore)
20
04
51.
52.
109
Macroeconomics

For the year 2000-01, the national accounts statistics at current prices were as follows:
GNP at Factor Cost
1,14,601
Depreciation
8,062
Subsidies
2,822
Net Factor Income from abroad
+330
Indirect Taxes
16,745
1,20,600
e.
1,29,240.
04
d.
20
1,20,524
04
c.
1,28,524
b.
M
AC
1,28,620
o.
a.
04
53. The value of GNP at Market Price is:
e.
1,20,580.
1,21,460
-4
d.
27
1,21,480
02
c.
4-
1,24,524
31
b.
1-
1,20,462
:8
a.
ef
.N
54. The value of NNP at Market Price is:
e.
1,20,132.
.IS
1,20,160
ed
d.
se
rv
1,20,145
re
c.
1,20,180
ht
b.
ig
1,20,250
lr
a.
BN
55. The value of NDP at Market Price is:
1,07,125
c.
1,06,209
d.
1,07,250
e.
1,05,850.
Pr
es
b.
ty
1,06,400
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
56. The value of NDP at Factor Cost is:
Th
e
20
04
For the year 2000-01, the national accounts statistics at current prices were as follows:
GNP at Factor Cost
Depreciation
8,062
Subsidies
2,822
+330
Indirect Taxes
16,745
Personal Income Taxes
10,000
Corporate Profit Taxes
6,539
Retained Profit
110
1,14,601
30,000
Part-II
57. The value of Personal Income is:

a.
65,000
b.
75,000
c.
70,500
d.
70,000
e.
72,000.
1,06,445
d.
1,06,579
e.
1,06,750.
04
c.
20
1,06,550
04
b.
1,06,539
a.
04
58. The value of National Income is:
66,000
e.
62,000.
o.
d.
ef
.N
60,000
c.
-4
58,000
27
b.
02
65,000
4-
a.
M
AC
59. The value of Personal Disposable Income is:
1-
31
:8
For the year 2000-01, the national accounts statistics at current prices were as follows.
Rs.
(in crore)
ed
.IS
BN
Particulars
se
rv
GNP at Factor Cost
re
Depreciation
ig
ht
Subsidies
8,062
2,822
+330
16,745
Personal Disposable Income
55,000
ty
Indirect Taxes
Pr
es
s.
Al
lr
1,14,601
80,000
Personal Income
60,000
iU
ni
ve
rs
i
National Income
20
04
Th
e
a.
Ic
fa
60. The value of Personal Income Taxes is:

4,800
b.
5,200
c.
5,050
d.
4,950
e.
5,000.
61. The value of Retained Profits is:

a.
18,000
b.
20,000
c.
22,000
d.
19,500
e.
21,000.
111
Macroeconomics
20
04
04
20
04
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS

a. 1,800
b. 2,400
c. 2,550
d. 1,850
e. 2,100.
63. The value of GDP at Factor Cost is:
a. 3,750
b. 3,350
c. 3,400
d. 3,550
e. 3,600.
a. 3,500
b. 3,550
c. 3,480
d. 3,600
e. 3,450.
65. The value of GNP at Market Price, is:
a. 4,350
b. 4,275
c. 4,150
d. 4,200
e. 4,150.
GNP at market price

Corporate Taxes
Personal Income Tax
Subsidies
Factor Income received from abroad
Factor Income paid abroad
Undistributed Profits
Indirect Taxes
Depreciation
04
Rs.
(in crore)
4,000
800
600
350
1,000
800
150
600
400
Particulars
66. The following information is available about the consumption patterns of a family and prices
in the year 1986-87 and 2001-02.
Quantity consumed
Prices
Item
1986-87 2001-02
1986-87
2001-02
Rs.3
per
kg
Rs.5
per kg
Rice (kg.)
30
25
Rs.4 per ltr
Rs.6 per ltr
Milk (ltr)
20
30
Rs.5 per doz
Rs.6.50 per doz
Eggs (doz)
1
2
Rs.15 per mtr
Rs.25 per mtr
Cloth (mtr.)
5
3
Re.30/ unit
Re. 0.40/ unit
Electricity (units)
100
150
112
Part-II
04
20
04
B
W
M
AC
o.
Rs. (in crore)

6,000
1,200
800
400
1,500
1,800
250
800
400
-4
27
02
431
1:8
BN
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS

a. 6,300
b. 6,390
c. 6,150
d. 6,210
e. 6,100.
68. The value of GNP at National Income is:
a. 5,300
b. 5,150
c. 5,200
d. 5,275
e. 5,225.
a. 3,100
b. 3,150
c. 3,050
d. 3,250
e. 3,283.
ef
.N
Particulars
GDP at Factor Cost
Personal Income Tax
Subsidies
Factor Income received from abroad
Factor Income paid abroad
Indirect Taxes
Depreciation
04
The index of Industrial Production for 2001-02 with reference to 1986-87 is:
a. 157.68
b. 151.75
c. 154.32
d. 155.58
e. 156.68.
20
04
Th
e
70. You are provided with the following information for an economy:
()500
2,000
Depreciation
1,900
Indirect Taxes
1,000
Subsidies
The difference between GDP at Market Prices and NNP at Factor Cost is:
a.
3,400
b.
3,250
c.
3,325
d.
3,425
e.
3,375.
113
Macroeconomics
27
-4
ef
.N
o.
M
AC
04
20
04
04
71. The GNP of an economy at nominal values and price indices for two years is given below.
Year
Money GNP
Price Level
(Rs. in crore)
Index
1990
23,200
49.70
2003
1,30,000
105.90
The real GNP for the years 1980 and 2003 are:
a. 46,730 and 1,22,757
b. 45,825 and 1,25,734
c. 45,938 and 1,23,757
d. 46,680 and 1,22,757
e. 46,680 and 1,23,725.
72. In an economy the GDP at factor cost is Rs.70,000, NNP at market price is Rs.71,000,
depreciation is Rs.2,000 and indirect taxes are Rs.1,000. There are no subsidies. The value of
the Net Factor Income from abroad is:
a. 2,500
b. 2,300
c. 2,450
d. 2,600
e. 2,000.
4-
02
:8
1-
31
The following is the information from the national income accounts for a hypothetical country:
BN
GNP
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Gross Investment
Net Investment
Consumption
Government Purchases of Goods and Services
National Income
Wages and Salaries
Proprietors Income + Rental income of persons
Dividends
Government Budget Surplus
Interest
Transfer payments
Personal tax and non-tax payments
20
04
Th
e
Ic
73. NNP at Market Prices is:

a.
2,350
b.
2,150
c.
2,200
d.
2,250
e.
2,400.
74. The value of Net Exports is:
114
a.
25
b.
32
c.
30
d.
20
e.
22.
Rs.
2,400
400
150
1,500
480
1,925
1,460
160
50
15
60
260
300
Part-II
75. The value of Net Indirect Taxes is:

a.
235
b.
250
c.
225
d.
210
e.
230.
230
d.
228
e.
254.
04
c.
20
265
04
b.
245
a.
04
76. The value of Corporate Profits is:
480
e.
495.
o.
d.
ef
.N
515
c.
-4
520
27
b.
02
485
4-
a.
M
AC
77. The value of TaxesTransfers is:
e.
2,040.
1-
2,100
:8
d.
BN
1,990
.IS
1,690
c.
ed
b.
se
rv
1,820
re
a.
31
1,720
d.
1,780
e.
1,650.
lr
c.
s.
Al
1,690
Pr
es
b.
ty
1,550
ni
ve
rs
i
a.
ig
ht
b.
185
c.
205
d.
198
e.
203.
Th
e
20
04
190
Ic
a.
fa
iU
80. The value of the Personal Savings is:

The following are the inter-industry transactions in an economy. (The figures represent the
money value of output).
Industries
A
B
C
Total Output
A
25
40
15
100
B
10
30
25
120
C
15
20
30
80
Total
100
120
80
115
Macroeconomics
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
81. The value of National Income in this economy is:

a. 95
b. 98
c. 93
d. 97
e. 90.
82. The value added in industry B is:
a. 22
b. 28
c. 30
d. 35
e. 42.
83. In an economy, saving-income ratio is 0.24. The average and incremental capital-output ratio
is 6. If the population is growing at 3% per annum, the growth in Per Capita Income would
be:
a. 1.5%
b. 1.2%
c. 1.25%
d. 2%
e. 1%.
84. In an economy the real output grows at the rate of 6% per year. The nominal supply of
money grows at the rate of 5% and the income elasticity of money demand is 0.5.
The rate of inflation in long-run equilibrium and the rate of growth of nominal income
respectively are:
a. 2% and 7%
b. 3% and 8%
c. 2% and 8%
d. 2.5% and 7.5%
e. 3% and 7%.
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
The following are inter-industry transactions in an economy. (The figures represent money
value of output).
Industries
X
Y
Z
Total
output
X
50
80
30
200
Y
20
60
50
240
Z
30
40
60
160
200
240
160
20
04
Th
e
Ic
85. The value of National Income in the economy is:

a.
175
b.
180
c.
183
d.
178
e.
172.
86. The value added in Industry Y is:

a. 65
b. 63
c. 68
d. 58
e. 60.
116
Part-II

The following information is extracted from the National Income Accountant of a
hypothetical economy for the year 2002-03.
Payment of Wages and Salaries by
Govt. Sector
Dividends paid by business
Transfer payment by Govt.
Sector (Domestic: Foreign, 8: 3)
Purchases by Govt. Sector
80
120
22
292
04
04
20
04
B
W
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
104
24
64
20
04
Ic
Th
e
90.
fa
iU
ni
ve
rs
i
ty
Pr
es
89.
s.
Al
lr
ig
ht
re
se
rv
ed
88.
Profit tax paid by business

Savings of Personal Sector
Savings of Business Sector
The value of GDP at Factor Cost is:
a. 1,275
b. 1,286
c. 1,234
d. 1,262
e. 1,264.
The value of GNP at Factor Cost is:
a. 1,232
b. 1,322
c. 1,228
d. 1,230
e. 1,235.
The value of GNP at Market Price is:
a. 1,375
b. 1,348
c. 1,425
d. 1,380
e. 1,362.
The value of GDP at Market Price is:
a. 1,392
b. 1,410
c. 1,380
d. 1,425
e. 1,390.
The value of Personal Disposable Income is:
a. 915
b. 920
c. 912
d. 918
e. 910.
.IS
87.
130
24
168
30
1,064
M
AC
Indirect taxes paid by business

Exports of goods and services
Personal Income Tax
Factor incomes received by personal sector
91.
117
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
92. The value of Depreciation is:

a. 7,500
b. 7,300
c. 7,200
d. 7,150
e. 7,000.
93. The value of Net Factor Income from abroad is:
a. 328
b. 420
c. 415
d. 422
e. 395.
94. The value of Subsidies is:
a. 2,000
b. 2,200
c. 1,950
d. 2,275
e. 1,930.
a. 88,435
b. 88,422
c. 88,350
d. 88,400
e. 88,398.
a. 87,500
b. 88,500
c. 83,500
d. 87,750
e. 88,000.
a. 51,500
b. 51,750
c. 52,375
d. 50,975
e. 50,437.
04
20
04
04
The following information is extracted from the National Income Accounts of an economy
for the year 2002-03.
Particulars
Rs. in crore
GNP at factor price
95,000
Indirect taxes
14,000
1,00,422
1,00,000
1,07,000
10,000
6,500
Retained profit
30,000
118
Part-II

a. 43,550
b. 42,000
c. 41,500
d. 41,350
e. 43,750.
04
R
-4
27
02
431
1:8
BN
.IS
ed
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv

a. 6,01,650
b. 6,01,665
c. 6,02,675
d. 6,02,667
e. 6,01,750.
a. 5,40,858
b. 5,47,691
c. 6,02,667
d. 4,80,079
e. 4,49,429.
a. 5,48,475
b. 5,48,960
c. 5,45,096
d. 5,47,790
e. 5,47,691.
a. 4,80,579
b. 4,80,079
c. 4,81,275
d. 4,81,570
e. 4,80,695.
103. The value of GNP at Factor Cost is:
a. 5,35,550
b. 5,35,750
c. 5,36,225
d. 5,35,055
e. 5,36,475.
ef
.N
o.
M
AC
04
20
For the year 2001-02 the National Accounts Statistics at current prices were as follows:
Particulars
Rs. in crore
NNP at factor price
4,73,246
Depreciation
61,809
Subsidies
19,431
6,833
Indirect Taxes
87,043
Personal Income Tax
9,759
Corporate Taxes
7,300
Retained Profit
6,758
04
119
Macroeconomics

a. 4,49,429
b. 4,48,736
c. 4,48,368
d. 4,48,578
e. 4,48,698.
105. The following data are extracted from the National Income Accounts of a Country (In million
units of currency).
04
1,70,992
ef
.N
R
-4
27
1-
31
4-
The indirect tax and Net Factor Income from abroad are:
a. 3,638 and 3,760
b. 3,438 and 3,725
c. 3,538 and 3,860
d. 3,425 and 3,658
e. 3,745 and 3,438.
o.
1,64,182
02
NDP at Factor Cost
11,888
M
AC
Depreciation
NNP at Market Prices
20
588
04
Subsidies
04
(MUC)
1,79,930
GNP a Factor Cost
BN
:8
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Payment of Wages and Salaries by Govt. Sector

Dividends paid by business
Transfer payment by Govt. Sector (Domestic 8: Foreign 3)
Purchases by Government Sector
Indirect Taxes paid by business
Export of Goods and Services
Personal Income Tax
Factor Income received by personal sector
Profit Tax paid by business
Savings of Personal Sector
Savings of Business Sector
20
04
Th
e
Ic
106. The value of GDP at Factor Cost is:

a. 631
b. 623
c. 648
d. 652
e. 675.
a. 622
b. 631
c. 616
d. 681
e. 696.
120
40
60
11
146
65
12
84
15
532
52
12
32
Part-II

a.
688
b.
678
c.
685
d.
669
e.
681.
e.
631.
04
681
20
d.
04
696
674
c.
b.
04
109. The value of GDP at Market Price is:

a. 685
452.
o.
e.
ef
.N
467
d.
-4
438
27
c.
02
456
4-
b.
M
AC
110. The value Personal Disposable Income is:

a. 475
re
1:8
se
rv
ed
.IS
BN
7,09,900
92,700
29,100
10,200
1,30,500
14,600
11,000
8,700
s.
Al
lr
ig
ht
NNP at factor cost

Depreciation
Subsidies
Indirect Taxes
Personal Income Tax
Corporate Tax
Retained Profits
31
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es

a. 9,04,000
b. 9,24,400
c. 8,11,350
d. 8,22,500
e. 8,12,600.
a. 8,12,300
b. 8,12,500
c. 8,11,800
d. 8,11,750
e. 8,11,300.
a. 8,22,500
b. 8,20,450
c. 8,21,500
d. 8,20,850
e. 8,21,750.
121
Macroeconomics

a.
7,20,500
b.
7,15,700
c.
7,18,100
d.
7,20,100
e.
7,19,980.
8,12,750
d.
8,22,650
e.
8,21,500.
04
c.
20
8,24,600
04
b.
8,02,600
a.
04
6,23,600
e.
6,74,500.
o.
d.
ef
.N
6,25,250
c.
-4
6,75,600
27
b.
02
6,25,600
4-
a.
M
AC
1-
31

Million units
of currency
se
rv
Indirect Business Taxes
ht
ig
s.
Al
Pr
es
1,000
91
50
101
34
87
Transfer payments by government
114
ty
Depreciation
lr
Personal Savings
re
ed
Personal Consumption Expenditure
.IS
BN
:8
Particulars
102
ve
rs
i
Personal tax payments
iU
ni
117. The value of Gross National Product at Factor Cost is:

1,280
Ic
fa
a.
1,230
c.
1,350
d.
1,420
e.
1,260.
20
04
Th
e
b.
122
a.
1,268
b.
1,264
c.
1,328
d.
1,245
e.
1,458.
Part-II
27
-4
ef
.N
o.
M
AC
04
20
04
04
119. The value of the Net National Product at Factor Cost is:
a. 1,175
b. 1,185
c. 1,136
d. 1,035
e. 1,173.
a. 1,142
b. 1,128
c. 1,185
d. 1,136
e. 1,145.
a. 1,134
b. 1,034
c. 1,136
d. 1,173
e. 1,264.
4-
02

Million Units
of Currency
5,000
600
100
2,000
300
700
500
400
250
100
150
100
1,500
650
:8
1-
31
Particulars
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
Wages and Salaries received by domestic residents

Dividends paid to domestic residents
Dividends paid to foreign residents
Gross Investment
Rentals
Indirect Taxes
Personal Income Tax payments
Retained earnings
Subsidies
Transfer payments
Net factor income received from abroad
Net Investment
Personal Savings
20
04
Th
e
122. The value of NNP a Factor Cost is:

a. 7,050
b. 7,150
c. 7,225
d. 7,075
e. 7,125.
123. The value of GDP at Market Price is:
a. 7,650
b. 7,375
c. 7,225
d. 7,850
e. 7,550.
123
Macroeconomics
124. The value of Personal Consumption Expenditure is:

a. 5,350
b. 5,500
c. 5,175
d. 5,400
e. 5,200.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
125. The following information pertains to national income aggregates of a hypothetical economy:
Particulars
Rs. in crore
Compensation to employees paid by the Government
50
Profit distributed as dividends by the firms
70
Old age pension, scholarships etc., distributed by Government
21
Purchases made by the Government sector
246
Indirect taxes paid by the firms
75
Value of exports
22
Factor income paid as dividends abroad
25
Corporate Tax
62
Personal Savings
22
Undistributed profits of the firms
42
Income Tax
94
Factor incomes received by the household sector
632
The Personal Disposable Income in the economy is
a. Rs.509 crore
b. Rs.539 crore
c. Rs.529 crore
d. Rs.559 crore
e. Rs.549 crore.
126. The personal income of an individual is Rs.5,000, if the income taxes paid is Rs.200,
consumption is Rs.4,300, interest payment on loans is Rs.100 and savings is Rs.400, the
disposable income of the individual is
a. Rs.5,000
b. Rs.4,800
c. Rs.4,300
d. Rs.4,900
d. Rs.4,600.
Th
e
Ic
fa
iU
ni
127. The following table gives information about price and units of aggregate output for the years
2002 and 2003.
Goods
20
04
P
Q
R
S
T
2002
2003
Quantity
Price (Rs.)
Quantity
Price (Rs.)
30
55
45
35
40
2.00
6.00
5.00
4.00
3.00
35
65
60
40
50
2.50
8.00
6.00
5.00
4.50
What is the value of GDP deflator for the year 2003?
124
a.
122.
b.
104.
c.
15.
d.
142.
e.
130.
Part-II
128. Given the following information, what would be the national income of the economy?
Particulars
MUC
2,325
Interest payments made by the firms
323
Rental Income received
43
Corporate Profits (before tax)
170
Proprietors Income
135
Dividends paid by the firms
72
Personal Taxes paid by the individuals
260
04
20
04
04
2,786 MUC.
2,996 MUC.
2,886 MUC.
3,115 MUC.
2,662 MUC.
M
AC
a.
b.
c.
d.
e.
:8
1-
31
4-
02
27
-4
ef
.N
o.
129. The following information is given from the national accounts of a country for the year
2002-03.
Particulars
MUC
Factor income earned within domestic territory
65,000
Gross domestic fixed capital formation
6,000
Net domestic fixed capital formation
4,000
85,000
Indirect Taxes
3,000
Subsidies
1,000
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
The net factor income from abroad for the year 2002-03 is
a. 15,000 MUC
b. 13,000 MUC
c. 16,000 MUC
d. 17,000 MUC
e. 11,000 MUC.
130. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by
4%, the real income increases by
a. 10.00%
b. 2.00%
c. 1.50%
d. 0.67%
e. 2.50%.
131. The equilibrium income for the economy is
a. 900 MUC
b. 825 MUC
c. 950 MUC
d. 930 MUC
e. 910 MUC.
132. Budget deficit/surplus for the economy is
a. 10 MUC (deficit)
b. 15 MUC (deficit)
c. 15 MUC (surplus)
d. 20 MUC (deficit)
e. 20 MUC (surplus).
125
Macroeconomics
04
04
133. The economy is opened to trade in goods and services with the rest of the world, and imports
and exports are as given below:
Imports (M) = 0.10Y
Exports (X)
= 420 MUC
The multiplier for the economy is
a. 2.0
b. 3.0
c. 3.5
d. 4.0
e. 4.5.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
134. The following data is taken from National Income Accounts of a country:
Rs. Cr.
1,700
Transfer payments
242
Indirect Taxes
173
Personal Taxes
203
Consumption of Capital
190
Undistributed Corporate Profits
28
Corporate Tax
75
Subsidies
20
Personal income in the country is
a. Rs.1,363 cr
b. Rs.1,121 cr
c. Rs.1,230 cr
d. Rs.1,296 cr
e. Rs.1,496 cr.
135. In an economy the factor income earned within domestic territory for the year 2002-03 is
50,000 MUC. For the year, consumption of capital is 3,000 MUC and the GNP at market
prices is 60,000 MUC. If indirect taxes are 2,000MUC and subsidies are 500 MUC, net factor
income from abroad is
a. 5,000 MUC
b. 5,500 MUC
c. 6,000 MUC
d. 6,500 MUC
e. 6,800 MUC.
20
04
Th
e
Ic
fa
iU

Production Account
Dr.
Rs. Cr.
Wages paid to domestic residents
400 Sales to Households
Wages paid to foreigners
240 Gross Fixed Investment
Changes in stock
Interest payments on loans taken
from foreign banks
10
Retained profits
20 Exports
Corporate tax
10
Imports
25
Indirect taxes
15
Depreciation
10
730
Assume that there is no government sector in the economy.
126
Cr.
Rs. Cr.
550
85
55
40
730
Part-II
136. For the economy, NDP at market prices is

a.
Rs.650 cr
b.
Rs.670 cr
c.
Rs.695 cr
d.
Rs.640 cr
e.
Rs.630 cr.
d.
Rs.45 cr (deficit)
e.
Rs.55 cr (deficit).
04
Rs.35 cr (deficit)
20
c.
04
Rs.35 cr (surplus)
b.
Rs.45 cr (surplus)
M
AC
a.
04
137. If the Factor Income received from abroad is Rs.200 cr., current account balance for the
economy is
ef
.N
o.
138. For an economy, GDP at market prices for the current year is 1500 MUC. If GDP deflator for
the current year is 120, real GDP for the current year would be
7,500 MUC
b.
1,250 MUC
c.
300 MUC
d.
1,800 MUC
e.
1,100 MUC.
:8
1-
31
4-
02
27
-4
a.
ve
rs
i
ty
Pr
es
re
se
rv
Primary Sector
100
15
15
10
12
10
7
ht
s.
Al
lr
ig
Items
Sales
Closing Stock
Intermediate Consumption
Opening Stock
Indirect taxes
Depreciation
Subsidies
ed
.IS
BN
139. An economy consists of three sectors: primary, secondary and tertiary sectors. Transactions
related to the three sectors are given below:
Secondary Sector
150
20
25
10
13
12
8
(MUC)
Tertiary Sector
130
25
15
15
17
15
7
ni
GDP at factor cost for the economy is

293 MUC
300 MUC
Ic
b.
fa
iU
a.
271 MUC
d.
258 MUC
e.
342 MUC.
20
04
Th
e
c.
140. Consider the following data:

Particulars
Factor income paid abroad by the business sector
Factor income received by household sector
Transfers to household sector
Wages and salaries paid by the business sector
Dividends paid by the business sector (of which Rs.10 is paid abroad)
Household savings
Factor income received from abroad by the household sector
MUC
10
160
20
100
20
60
20
127
Macroeconomics
The amount paid by the government to the households towards wages and salaries is
a.
10 MUC
b.
20 MUC
c.
30 MUC
d.
40 MUC
e.
50 MUC.
Capital consumption allowance
356.4
Social security contributions
253.0
Personal Taxes
402.1
64.4
Interest paid by government
105.1
Government and business transfers
374.5
Personal consumption expenditures
1,991.9
M
AC
o.
:8
BN
.IS
se
rv
2,455.3.
re
e.
2,456.4
ht
d.
ig
2,453.2
lr
c.
s.
Al
2,455.8
Pr
es
2,450.4
b.
ed
141. The value of National income is:

a.
1-
Interest paid by consumers
ef
.N
66.4
Corporate dividends
-4
120.3
27
Proprietors income
02
164.8
4-
Corporate profits
34.1
31
Rental income of persons
04
266.3
20
264.9
04
Business interest payments
04
1,866.3
Compensation of employees
3073.9
b.
3072.5
c.
3074.7
3072.7
Ic
d.
fa
iU
ni
ve
rs
i
a.
ty
142. The value of GNP is:
Th
e
e.
3073.1.
20
04
Personal consumption expenditure

Corporate income tax
Personal savings
Depreciation
128
Million of
Currency Units
1,475.0
210.8
75.0
212.4
72.0
175.8
235.0
212.6
Part-II
143. The value of National income is:

a.
1,512
b.
1,622
c.
1,812
d.
1,775
1,580
d.
1,625
e.
1,645.
04
c.
20
1,645
04
b.
1,547
a.
04
e. 1,720.
144. The value of Personal disposable income is:
1,920.
o.
ef
.N
R
27
02
431
1:8
BN
ed
e.
se
rv
1,790
re
d.
1,860
ht
c.
ig
1,882
lr
b.
s.
Al
1,765
Pr
es
a.
.IS
Calculate National income.
1,525
215
95
220
72
180
235
205
-4

Personal savings
Depreciation
M
AC
145. The figures given below are pertaining to year 2001.(Rs. in crore)
GNP at factor cost
6,000
1,200
800
400
1,500
1,800
250
800
400
Ic
fa
iU

Personal income tax
Subsidies
Factor incomes received from abroad
Factor incomes paid abroad
Indirect taxes
Depreciation
Th
e
20
04
Rs.
ni
ve
rs
i
ty
146. Compute National income from the following.
a.
5,250
b.
5,400
c.
5,600
d.
5,700
e.
5,500.
129
Macroeconomics
147. From the following information, calculate GNP at Factor Cost.

Depreciation
Subsidies
Indirect Taxes
20
04
04
88,065
88,195
88,105
88,275
88,365.
04
a.
b.
c.
d.
e.
88,750
260
5,220
1,820
10,825
M
AC
o.
ef
.N
R
-4
27
02
re
se
rv
ed
.IS
BN
:8
1-
31
Calculate NDP at market price.

a. 5,54,450
b. 5,54,320
c. 5,54,650
d. 5,54,280
e. 5,54,560.
4,82,220
62,725
20,150
6,800
85,450
9,600
7,500
6,850
4-
NNP at factor cost

Depreciation
Subsidies
Indirect taxes
Corporate Taxes
Retained profits
148. Following are the National income statistics at current prices.
ig
lr
1,72,250
520
1,63,740
12,180
1,57,170
fa
iU
ni
2,750
2,600
2,450
2,900
2,850.
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
GNP at factor cost

Subsidies
NNP at market price
Depreciation
NDP at factor cost
ht
149. From the following National income data, calculate net factor income from abroad.
150.
Particulars
Personal savings
Depreciation
Transfer payments by government
130
Million units of
currency (MUC)
1,300
105
72
116
45
98
124
112
Part-II
Calculate the National income.

a.
1,432
b.
1,521
c.
1,560
d.
1,476
e.
1,620.
The following are the data pertaining to National income of an economy.
-4
ef
.N
o.
M
AC
04
20
04
04
Rs. in crores
1,90,000
28,000
2,00,844
2,00,000
2,14,000
20,000
13,000
60,000
27
Particulars
GNP at factor prices
Indirect taxes
GNP at Market prices
Corporate Profit taxes
Retained Profits
1,60,000.
4-
1,58,000
e.
31
d.
1-
1,76,000
:8
c.
BN
1,54,000
.IS
b.
ed
1,74,000
se
rv
a.
02
151. Calculate National income.
84,450
e.
83,600.
d.
ht
84,700
ig
c.
lr
83,000
s.
Al
b.
Pr
es
82,300
ty
a.
re
152. Calculate Personal Disposable income.
ve
rs
i
153. Following are the national income statistics of an economy.
20
04
Th
e
Ic
fa
iU
ni
GNP at Factor cost

Depreciation
Subsidies
Net factor income from Abroad
Indirect taxes
Personal income tax
Corporate profits tax
Retained Profit
=
=
=
=
=
=
=
=
1,14,605
8,165
2,865
350
16,745
12,500
7,250
32,000
Calculate National income.

a.
1,06,440
b.
1,05,525
c.
1,06,530
d.
1,06,205
e.
1,07,125.
131
Macroeconomics
154. From the following information, calculate National income.

Particulars
1,845
e.
1,875.
04
04
d.
1,989
c.
M
AC
1,895
o.
1,998
b.
ef
.N
a.
20

Personal savings
Depreciation
04
Million units of
currency
1,675
230
112
240
72
182
320
210
Subsidies
4-
BN
.IS
ed
3,775.
se
rv
e.
re
3,640
d.
ht
3,625
ig
c.
lr
3,745
s.
Al
b.
1,200
Pr
es
3,650
31
2,100
1-
Indirect taxes
:8
2,250
02
() 625
Depreciation
a.
27
-4
155. Calculate the difference between GDP at Market price and NNP at factor cost from the
following information.
ve
rs
i
ty
Particulars
20
04
Th
e
Ic
fa
iU
ni

Undistributed corporate profit
Personal savings
Depreciation
Transfer to household sector
Million of
Currency
1,332
180.8
80.0
202.4
68.0
173.6
228.0
203.6
156. The Gross National Product at Market Price is:
132
a.
2,012.4
b.
2,156.8
c.
2,896.3
d.
2,225.5
e.
2,139.6.
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
se
rv
ed
.IS

a. 1,845.7
b. 1,827.6
c. 1,838.8
d. 1,842.3
e. 1,836.5.
a. 1,655
b. 1,664
c. 1,678
d. 1,573
e. 1,658.
a. 1,633.6
b. 1,603.6
c. 1,645.3
d. 1,628.7
e. 1,632.5.
a. 1,505
b. 1,495
c. 1,378
d. 1,400
e. 1,250.
04
Part-II
re
s.
Al
lr
ig
ht
161. In an economy, investment expenditure increased by Rs.120 and government expenditure is

increased by 40%. The revised GNP when potential GNP of the economy is Rs.2,000,
marginal propensity to save is 0.25 would be other relevant information are:
ve
rs
i
ty
Pr
es
Consumption
Investment
Government expenditure
=
=
=
1,200
200
50
20
04
Th
e
Ic
fa
iU
ni
a. 2,015
b. 2,018
c. 2,010
d. 2,016
e. 2,009.
162. Marginal propensity to import (MPI) = 0.10
Marginal propensity to save (MPS) = 0.25
If the autonomous investment increased by Rs.100.
The value of Multiplier will be:
a. 2.558
b. 2.852
c. 2.857
d. 2.358
e. 2.493.
133
Macroeconomics
04
20
04
04
163. The change in Level of Income is:

a. 285.7
b. 284.8
c. 243.5
d. 284.6
e. 275.6.
164. The change in level of imports is:
a. 27.57
b. 26.89
c. 28.57
d. 26.34
e. 27.43.
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
166. The investment multiplier for the economy is:

Savings function
(S)
40+0.25Yd
d
Disposable income (Y )
YT
Tax function (T)
0.20Y
Investment function (I)
120 12i
Government expenditure (G)
80
Exports
(E)
60
Imports
(M)
0.1Y
20
04
Th
e
Ic
The following information is given:

a. 2.3
b. 2.5
c. 2.6
d. 2.9
e. 2.0.
167.
Consumption (C)
Investment (I)
Exports (E)
Imports (M)
Marginal propensity to save (MPS)
Potential GNP of the economy
134
ef
.N
R
-4
27
02
431
1:8
BN
.IS
ed
se
rv
The countrys budget surplus is:

a. 33.5
b. 44
c. 40
d. 35
e. 38.
o.
0.35Y
0.15Y
20 + 0.22Yd
45
18
20
8
re
Tax function
Import function
Saving function
Investment (I)
Exports (X)
Transfer payments (R)
M
AC
165.
1,000
400
500
200
180
0.35
2,500
Part-II
M
AC
04
20
04
04
If the government expenditure increased by 160 and investment expenditure increased by

180, the change in price level is:
a. 15.23%
b. 15.56%
c. 15.48%
d. 15.36%
e. 15.65%.
168. Marginal Propensity to save (MPS) is 0.3 and the marginal propensity to import (MPI) is
0.10. If the autonomous investment increases by 560, it affect the level of imports would be?
a. Increase in import by 560.
b. Decrease in import by 235.
c. Decrease in import by 140.
d. Increase in import by 140.
e. No change in import.
02
27
-4
ef
.N
o.
169. The following is the simple model of an economy.

Consumption function (C)
250 + 0.75Y
65 + 0.15Y
90
Exports
(X)
125
Import function (M)
0.15Y
re
Yd (Disposable Income)
C (Consumption)
Rs.400
Rs.360
Rs.500
Rs.400
Rs.600
Rs.580
Rs.700
Rs.670
The Marginal Propensity to consume (MPC) when C = Rs.40 + bYd, where d is the MPC is:
a. (C 42)/Yd
b. (C 40)/bYd
c. (C 45)/Yd
d. (C 40)/Yd
e. (C 41)/Yd.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
170.
se
rv
ed
.IS
BN
:8
1-
31
4-
When the exports increase by 25, The change in the equilibrium level of income will be:
a. 2,220
b. 2,100
c. 2,250
d. 2,218
e. 2,020.
20
04
171.
Equilibrium income
Income tax rate
Marginal Propensity to consume
2,000
20%
0.85
For every 100 increase in income the tendency to spend 10 on imports.

If the government expenditure increases by 200, The new equilibrium income will be:
a. 2,474.2
b. 2,484.3
c. 2,467.2
d. 2,478.5
e. 2,476.2.
135
Macroeconomics
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
172. Consumption function Ct= 10 + 0.6 Ydt + 0.3 Ct 1

Where Ct and Ct1 denote consumption in period t and t1 respectively and Ydt is the disposal
income in period t. Now suppose Ydt increases from 100 to 120 and remains there
indefinitely, The change in steady state level of consumption is:
a. 17
b. 20
c. 21
d. 32
e. 12.
173. The savings and import functions have been estimated as follows:
S
=
50 + 0.25Y
M =
0.10Y
where S is aggregate savings, M is imports and Y is GDP. Private investment increases by
200 and government expenditure decreased by 60.
The increase in GDP is would be:
a. 440
b. 438
c. 425
d. 400
e. 445.
re
se
rv
ed
.IS
BN
Consumption function
Investment function
Exogenous government expenditure
Exogenous exports
Import function
Interest
= 200 + 0.6Y
= 0.3Y 15i
= 100
= 50
= 0.1Y
=4
ht
C
I
G
E
M
I
:8
1-
Based on the following information answer the questions 174 and 175
1,465
d.
1,398
e.
1,440.
s.
Al
1,450
c.
Pr
es
b.
ty
1,375
iU
ni
ve
rs
i
a.
lr
ig
174. The equilibrium level of income in the economy is:
20
04
b.
Ic
Th
e
a.
fa
175. The investment multiplier for the economy is:

6
c.
d.
e. 3.
176. In an economy marginal propensity to consume is 0.90 and the marginal propensity to import is
0.10. If there is an autonomous increase in investment of 200, The level of imports would be:
136
a.
1,000
b.
1,500
c.
1,250
d.
1,100
e.
1,050.
Part-II
177. Ct = 25 + 0.6Ydt + 0.2 Ct1

Where Ct and Ct 1 denote consumption in periods t and t 1 respectively.
Ydt is the disposable income in period t.
37.75
c.
38.90
d.
38.28
e.
37.50.
04
b.
20
39.50
04
a.
04
The disposable income increased from 200 to 250. The increase in disposable income on the
steady state level of consumption is:
178. Consumption function is given as follows:
M
AC
= 12.25 + 0.611 Ydt + 0.276 Ct1
Ct
83.65.
e.
-4
84.45
27
d.
02
85.28
4-
c.
31
84.39
1-
b.
:8
83.58
BN
a.
ef
.N
o.
Where Ct and Ct 1 denote consumption in periods t and t 1 respectively and Ydt is the
disposable income in the period t. If Ydt increases from 500 to 600 and remains there
indefinitely, The change in the steady state level of consumption would be:
.IS
179. The following information is provided:

8 + 0.15 Yd
0.2Y
0.10Y
20
re
se
rv
ed
Savings function (S)

Tax function (T)
Import function (M)
ig
ht
Investment ( I )
5
10
ve
rs
i
ty
Exports ( X)
Pr
es
10
lr
s.
Al
Govt. expenditure ( G )
The value of budget deficit at equilibrium is:

9.68
b.
9.50
20
04
iU
fa
Ic
Th
e
c.
ni
a.
9.48
d.
9.67
e.
9.88.
180. Economy has the break even level income of 900 (i.e. income = consumption) and the
equilibrium level of income of 4,500. If the saving in equilibrium is 1,080, The value of the
multiplier in the economy. (Approximately) would be:
a.
3.33
b.
3.45
c.
3.38
d.
3.15
e.
3.41.
137
Macroeconomics
181. Value of the equilibrium income is:

Particulars
Rs. in crore
Autonomous consumption
400.00
0.30
Autonomous investment
15.00
Induced investment co-efficient
0.10
Exports (exogenous)
20.00
Propensity to import
0.05
d.
2,472
e.
2,435.
2,457
c.
M
AC
2,466
o.
b.
ef
.N
2,442
a.
04
45.00
04
Transfer income (Exogenous)
04
150.00
20
Government expenditure (exogenous)
-4
182. Consumption function is given by:
02
27
Ct = 20 + 0.75 Ydt + 0.15Ct 1
31
4-
where,
1-
Ct = Consumption in period t
.IS
Ydt = Disposable income in period t.
BN
:8
Ct1 = Consumption in Period t1
185.
se
rv
e.
re
181
d.
ht
176
ig
174
lr
b.
c.
s.
Al
172
Pr
es
a.
ed
If Ydt increases from 700 to 900, The change in steady state level of consumption is:
ty
C
= C0 +Y d
Disposable income
Yd
=YT
= I
iU
ni
ve
rs
i
Ic
fa
Investment
= G
Exports
= E
Import function
= M0+Y
Where,
C0
= 80
20
04
Th
e
Government Expenditure G
G and T
138
= 30
I
= 100
= 0.8
= 120
M0
= 110
= 0.1
Part-II
183. The value of the Equilibrium level of income is:

a.
657
b.
662
c.
665
d.
654
e.
653.
184. The value of the Multiplier is:

3.33
b.
3.42
c.
3.39
d.
3.56
e.
3.25.
M
AC
04
20
04
04
a.
Exports
= E
Import
where,
C0
= M
= 140
= 0.8
=YT
= I
-4
Disposable income
Yd
Investment
I
Government Expenditure G
ef
.N
= C0 + Y d
27
Y=C+I+G+EX
o.
185.
431
1:8
BN
.IS
se
rv
ed
= 75
= 35
02
= G
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
= 30
E
M = 25
The value of the equilibrium level of income is:
a. 1,279
b. 1,237
c. 1,275
d. 1,248
e. 1,267.
Ic
fa
186. The value of investment multiplier is:
20
04
Th
e

Disposable income (Yd)
Tax function (T)
Govt. expenditure ( G )
Exports ( E )
Import (M)
a.
b.
c.
d.
e.
= 40 + 0.25Yd
=YT
= 0.20Y
= 120 12i
= 80
= 60
= 0.1Y
2.5
1.5
2
1
2.3.
139
Macroeconomics
= C + I + G + (X M)
= C0+ Yd
T
Yd
M
= T0 + tY
=YT
= M0 + Y
= 90
= 65
X
C0
M0
= 80
04
04
Y
C
04
20
= 70
= 40
= 0.9
R
-4
27
02
431
1:8
BN
.IS
ed
se
rv
re
lr
ig
ht
187. The volume of the multiplier is:

a. 2.33
b. 2.41
c. 2.31
d. 2.30
e. 2.38.
188. Income Y (GNP) is:
a. 576.42
b. 577.31
c. 575.32
d. 574.42
e. 575.67.
ef
.N
o.
M
AC
= 0.15
= 0.2
= 20
t
T0
s.
Al
189. The value of the multiplier where consumption function C = 80 + Yd.
fa
iU
ni
ve
rs
i
ty
Pr
es

400
600
800
900
Th
e
Ic
a. 5.0
b. 3.8
c. 4.2
d. 4.8
e. 4.0.
190. Saving function= 80 + 0.20Y
Import function = 0.10Y
If the Government expenditure is increased by 200, The impact on GNP would be:
a. Increase in GNP by 668.6
b. Decrease in GNP by 568.6
c. Decrease in GNP by 666.9
d. Increase in GNP by 666.6
e. No change in GNP.
20
04
Consumption (C)
380
480
660
720
140
Part-II
191. Saving function= 80 + 0.20Yx

If the Government expenditure is increased by 300, and investment decreases by 50, The
impact on GNP would be:
Increase in GNP by 800.50
b.
Increase in GNP by 832.5
c.
Decrease in GNP by 823.5
d.
Decrease in GNP by 800.5
e.
No change in GNP.
04
a.
Where,
= 0.8
= 0.2
= 0.1
= 120
= 120
M
AC
=I
o.
Investment
ef
.N
=YT
= T0 + Ty
=G
=E
.IS
BN
:8
1-
31
4-
02
27
-4
Disposable income Yd
Tax
T
Export function
04
20
04
192. If the Government expenditure increases by 40 and investment by 50, value of the increased
income would be:
Consumption function C
= C0 + Yd
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
a. 195.9
b. 194.6
c. 195.3
d. 197.8
e. 196.6.
193. The consumption function C= 40 + PYd, find out MPC = .8 and disposable income Rs.800.
The value of the consumption would be:
a. 640
b. 860
c. 645
d. 865
e. 680.
194. C = 50 + 0.9Yd
Yd = Y T
T
= 10 + 0.2Y
Y =C+I+G
I
= I exogenous
G = G exogenous
The equilibrium income for I = 50, G = 40 is:
a. 467.86
b. 478.90
c. 463.80
d. 478.59
e. 460.43.
141
04
20
04
B
M
AC
195. Marginal Propensity to Consume (MPC)= 0.75

Proportional Tax rate= 0.20
If the Government expenditure increases by 500, the rise in budget deficit will be:
a. 265
b. 245
c. 260
d. 270
e. 250.
196. C = 500
I = 100
G = 100
Potential GNP of the economy = 800
2
Marginal propensity to consume =
3
04
Macroeconomics
1-
31
4-
02
27
-4
ef
.N
o.
If the investment expenditure increased by 50 and government expenditure increased by 40,

The revised GNP will be:
a. 970
b. 985
c. 900
d. 952
e. 960.
BN
:8
197. The following data pertains to national income aggregates of a hypothetical economy:
ed
.IS
Consumption function (C) = 200 + 0.80Yd, where Yd is

disposable income
= 500 MUC
se
rv
Investment (I)
= 200 MUC
Taxes (T)
= 100 MUC
ig
ht
re
Government spending (G)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
The equilibrium level of savings is

a. 600 MUC
b. 700 MUC
c. 500 MUC
d. 800 MUC
e. 900 MUC.
198. In a two-sector economy, the savings function is estimated to be S = 20 + 0.30Yd. If the
equilibrium output is 600, the level of investment in the economy is
a. 140 MUC
b. 150 MUC
c. 160 MUC
d. 130 MUC
e. 170 MUC.
199. The following data pertains to a hypothetical economy.

Investment (I)
Tax function (T)
142
= 70 + 0.75Yd
= 80 MUC
= 70 MUC
= 0.2Y
Part-II
20
04
.IS
ve
rs
i
Th
e
Ic
fa
iU
ni
203.
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
202.
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
201.
M
AC
04
20
04
04
200.
At equilibrium, the budget surplus (deficit) in the economy is

a. (30) MUC
b. 30 MUC
c. 40 MUC
d. 50 MUC
e. (40) MUC.
In an economy the savings function and investment functions are given by S = 50 + 0.3Y
and I = 150 5i respectively. If the equilibrium income level,Y = 500, the rate of interest is
a. 20.0%
b. 15.0%
c. 10.0%
d. 5.0%
e. 12.5%.
For a hypothetical economy the following is the estimated steady state consumption function.
Ct = 10 + 0.5Yd t + 0.4C t1
Where Ct and Ct-1 denote consumption in periods t and t-1. If the Ydt increased from
400MUC to 500 MUC, what is the amount of change in steady state consumption?
a. 53.33 MUC.
b. 65.33 MUC.
c. 83.33 MUC.
d. 75.33 MUC.
e. 61.33 MUC.
The savings function for an economy is given by S = 50 + 0.25Y and the import function,
M= 0.15Y. If the government intends to increase the GNP by 500 MUC, what should be the
increase in government expenditure?
a. 100 MUC.
b. 50 MUC.
c. 200 MUC.
d. 250 MUC.
e. 300 MUC.
The full employment output for an economy is estimated to be 700. The current level of
output is 600. MPS for the economy is estimated to be 0.2.What should be the change in
government spending if the government is committed to bring full-employment level of
output?
a. 50 MUC.
b. 75 MUC.
c. 20 MUC.
d. 125 MUC.
e. 150 MUC.
In a two-sector economy the marginal propensity to save is constant at 0.25 and the breakeven income is 12,000 MUC. If the current level of income is 16,000 MUC, the amount of
savings in the economy is
a. 6,000 MUC
b. 1,000 MUC
c. 5,000 MUC
d. 7,000 MUC
e. 2,000 MUC.
204.
143
Macroeconomics
205. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC,
private savings for the year is
a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
d.
500 MUC
e.
600 MUC.
04
400 MUC
c.
300 MUC
M
AC
b.
o.
200 MUC
ef
.N
a.
20
04
04
206. Acceleration coefficient in an economy is 2. Investment in a period is equal to 75% of the

difference between the desired capital stock and the existing capital stock. If income in
period t is expected to increase by 200 MUC, investment during the period t will be
e.
6.
02
4-
d.
31
1-
c.
:8
BN
b.
.IS
ed
a.
27
-4
207. In a hypothetical economy, if the marginal propensity to consume is 0.75; marginal

propensity to import is 0.10; and the tax rate is 20%, then the value of multiplier will be
re
se
rv
208. Consumption function for an economy is estimated to be C = 400+0.75Yd, where C and Yd

are measured in Rs. cr. The level of consumption at which the savings will be zero is
Rs.1,400 cr
b.
Rs.1,500 cr
c.
Rs.1,600 cr
d.
Rs.1,700 cr
e.
Rs.1,300 cr.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
fa
b.
Rs.525.
c.
Rs.625.
d.
Rs.425.
e.
Rs.325.
Th
e
20
04
Rs.125.
Ic
a.
iU
ni
209. The break-even income of Mr. Ravi is Rs.5,000 and his Marginal Propensity to Consume is
3/4. If his current income is Rs.2,500, how much would Mr. Ravi borrow?
210. In a two sector economy the savings function is S = 60 + 0.25 Yd. If the investment in the
economy is 100 Million Units of Currency (MUC), equilibrium income will be
144
a.
620 MUC
b.
640 MUC
c.
660 MUC
d.
650 MUC
e.
630 MUC.
Part-II
211. The following information pertains to an economy:

(MUC)
Private consumption expenditure
750
Investment in fixed capital
250
Increase in stock
150
100
230
04
Money supply
20
150
Imports
04
50
04
Merchandise exports
e.
1.
o.
ef
.N
d.
-4
c.
27
02
b.
1-
212. The following are the data related to an economy.
4-
31
a.
M
AC
The velocity of money in the economy is
BN
:8
C = 1000
G = 200
se
rv
Potential GNP of the economy is 1600
ed
.IS
I = 200
re
MPC= 2/3
c.
375
d.
325
e.
310.
Pr
es
360
ty
b.
ve
rs
i
340
fa
iU
ni
a.
s.
Al
lr
ig
ht
If the expenditure increased by 100 and government expenditure increased by 80, the
increase in GNP would be:
Th
e
Ic
213. Consider the following economic functions.
20
04
S = 380 + 0.2Y
M= 0.15Y
Where I is aggregate saving, M is import and Y is national product. If the private gross
domestic investment (I) increases by 280 units and the government spending decreases by 72
units what will be the increase in national product?
a.
590.50.
b.
588.24.
c.
594.28.
d.
578.75.
e.
560.43.
145
Macroeconomics
214. From the following economic relationships calculate Multiplier.

Y
C + I + G + (X)
C0 + Yd
T0 + tY
YT
M0 + Y
90
65
80
C0
70
M0
40
0.9
0.15
0.2
T0
20
-4
ef
.N
o.
M
AC
04
20
04
04
M (Imports)
2.33
b.
2.35
c.
2.45
d.
2.28
e.
2.50.
:8
1-
31
4-
02
27
a.
BN
ed
.IS
se
rv
d.
831.2.
e.
833.7.
ig
833.9.
lr
c.
s.
Al
832.5.
Pr
es
b.
ty
831.5.
ve
rs
i
a.
ht
re
If in the economy, government expenditure is increased by 300 and investment decreased by

50, what will be the increase in GNP?
iU
ni
216.
fa
Consumption function C
Th
e
Ic
Disposable income Yd
20
04
Tax
= T0 + tY
= G
Import function
= M + Y
Export function
Investment
= E
= I
= 0.8
Where,
146
= C0 + Yd
= YT
= 0.2
= 0.1
= 120
= 120
Part-II
If the government expenditure and investment increased by 40 and 50 respectively, what would be
the increase in income?
a. 195.6.
b. 197.8.
c. 194.4.
d. 195.8.
e. 194.7.
217. The following relationships are given in an economy
04
20
04
04
C = 50 + 0.9Yd
Yd = Y T
T = 10 + 0.2Y
Y=C+I+G
I = I exogenous
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
G= G exogenous
Calculate the equilibrium income for I = 50, G = 40.
a. 469.85
b. 467.28
c. 466.52
d. 467.86
e. 468.59.
218. In an economy the marginal propensity to consume is 0.75, and the proportional tax rate is
0.20. When there is an increase in government expenditure by Rs.500, calculate the rise in
budget deficit.
a. 278
b. 265
c. 245
d. 225
e. 250.
219. The following data refer to a hypothetical economy for 19x2.
ve
rs
i
ty
Pr
es
s.
Al
lr
C =
500
I
=
100
G =
100
Potential GNP of the economy is 800.
MPC = 2/3
20
04
Th
e
Ic
fa
iU
ni
If investment expenditure increased by 50 and government expenditure increased by 40,

calculate revised GNP?
a. 925.
b. 936.
c. 945.
d. 970.
e. 960.
220. The following relations and parameters are specified for a hypothetical economy.
8 + 0.15Yd
Tax function (T)

Import function (M)
Investment (I)
Exports (X)
=
=
=
=
=
=
0.2Y
0.10Y
20
10
5
10
147
Macroeconomics
C+I+G+EX
C0 + Yd
C0
140
0.8
75
30
25
35
ve
rs
i
ty
Pr
es
s.
Al
lr
fa
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Calculate the budget deficit at equilibrium.

a. 9.75
b. 9.23
c. 9.88
d. 9.60
e. 9.15.
221. In an economy the marginal propensity to consume is 0.90 and the marginal propensity to
import is 0.10. If there is an autonomous increase in investment of 200, what will be the level
of imports?
a. 125.
b. 110.
c. 100.
d. 128.
e. 135.
222. The following consumption function is estimated for an economy:
Ct = 20 + 0.75 Ydt + 0.15Ct1
where,
Ct = Consumption in period t
Ct1 = Consumption in period t1
Ydt = Disposable income in period t.
If Ydt increases from 700 to 900 and remains there indefinitely, calculate the change in the
steady state level of consumption.
a. 176
b. 170
c. 165
d. 162
e. 182.
223.
iU
ni
20
04
Th
e
Ic
where,
Find the equilibrium level of income.

a. 1,260
148
b.
1,320
c.
1,245
d.
1,275
e.
1,350.
Part-II
224. The following relationship are given in an economy

C
Yd
T
Y
I
G
50 + 0.8Yd
YT
10 + 0.3Y
C+I+G
I exogenous
G exogenous
=
=
=
=
=
=
fa
iU
ni
1,200.
1,600.
1,100.
1,000.
1,300.
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Calculate the equilibrium level of income, aggregate consumption and government budget
deficit for I = 60, G = 45.
a. 335.7
b. 342.8
c. 328.3
d. 348.2
e. 331.8.
225. For the saving function S = 500 + 0.2Y, at what level of income savings will be equal to
investment, if the autonomous investment is Rs.100 crores?
a. 3,200.
b. 3,500.
c. 3,000.
d. 3,325.
e. 3,450.
226. If the aggregate income rises from 50 lakh to Rs.250 lakh as a result of increase in investment
of Rs.20 lakh, find the value of Marginal Propensity to Consume.
a. 0.90
b. 0.82
c. 0.75
d. 0.88
e. 0.95.
227. What would be the change in aggregate income and aggregate consumption, when
investment increases by Rs.100 crore in 1999?
Year Aggregate income Aggregate consumption
(Rs. in Crores)
(Rs. in Crores)
1997
10,000
9,000
1998
11,000
9,900
228.
Tax function
Import function
Saving function
Investment ( I )
=
=
=
=
0.3Y
0.18Y
20 + 0.25 Yd
50
Government expenditure ( G ) = 20
= 22
Exports ( X )
Transfer payments
= 10
Calculate the budget surplus at equilibrium.

149
Macroeconomics
a. 25.68
b. 26.75
c. 24.73
d. 25.52
e. 23.25.
229. Calculate the multiplier for the economy for the following Yd and C where consumption
function C = 90 + Yd.
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Disposable income (Yd) = 1,000

Consumption
(C) = 850
a. 4.28
b. 5.20
c. 3.75
d. 4.17
e. 5.02.
If the government expenditure increased by 500 and investment decreased by 75, what is the
increase in GDP?
a. 1165.0.
b. 1147.5.
c. 1232.5.
d. 1275.4.
e. 1345.7.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
231. The following relations represent a simple model of an open economy:

= 280 + 0.75Y
= 75 + 0.15Y
Government expenditure (G) = 94
Exports (X)
= 126
Import function (M)
= 0.20Y
2.3
c.
3.4
d.
ty
b.
ve
rs
i
2.5
iU
ni
a.
fa
The exports economy increase by 30. Compute the foreign trade multiplier.
Th
e
Ic
4.2
20
04
e.
4.0.
232.
150
Autonomous Consumption
460
Marginal Propensity to Save
0.3
Autonomous investment
18
Induced investment Coefficient
0.1
Government Expenditure (Exogenous)
162
Transfer income (Exogenous)
48
Exports (Exogenous)
25
Propensity to Import
0.05
Part-II
Calculate the equilibrium income in the economy.

a.
2,655.5
b.
2,725.5
c.
2,742.4
d.
2,628.4
e.
2,528.5.
233. In a two-sector economy, Savings and Investment functions are given as

S = 62 + 0.25Y
04
04
I = 78 230i
d.
472
e.
485.
467
M
AC
c.
o.
448
ef
.N
b.
435
-4
a.
04
20
Where Y is output for the economy and i is rate of interest which is 10 percent at present.
Find the equilibrium level of output for the economy.
02
27
234. Marginal Propensity to Import (MPI)= 0.12
31
4-
Marginal Propensity to save (MPS)= 0.30
e.
42.15.
:8
43.75
BN
d.
.IS
42.84
ed
c.
se
rv
41.43
re
b.
43.55
ht
a.
1-
If an autonomous investment increased by 150 calculate the change in level of Imports.
c.
2.5
d.
3.2
e.
2.2.
Pr
es
2.8
ty
b.
ve
rs
i
3.1
Ic
fa
iU
ni
a.
s.
Al
lr
ig
235. In an economy the break even level income is 1,200 and the equilibrium level of income is
4,800. If the savings in equilibrium is 1,400, calculate the multiplier in the economy.
20
04
Th
e
236. Planned consumption: 40 + 0.75Y

Planned investment: 60
The value of savings is:
a.
62
b.
60
c.
53
d.
65
e.
61.
151
Macroeconomics
237. The planned consumption (C) = 50 + 0.80Yd

Investment
(I) = 80
Yd = Y, since there is no government sector.
625
b.
618
c.
650
d.
647
e.
635.
04
a.
04
The equilibrium level of income is:
04
20
238. The following are the economic information for the year 2002.
0.35
Potential GNP of the Economy
2,700
W
o.
Marginal propensity to save (MPS)
ef
.N
195
Imports (M)
-4
210
27
Exports (E)
02
600
4-
31
450
1-
Investment (I)
M
AC
1,200
:8
Consumption (C)
(Rs. in crore)
18.7%
e.
18.2%.
se
rv
d.
re
16.2%
c.
ht
17.5%
ig
b.
lr
16.8%
s.
Al
a.
ed
.IS
BN
If government expenditure increased by 150 and investment expenditure increased by 175,

the increase in price level would be:
270 + 0.75Y
72 + 0.15Y
ty
ve
rs
i
Pr
es
120
Exports (X)
140
Import function (M)
0.13Y
20
04
Th
e
Ic
fa
iU
ni
152
Due to an exogenous boost to the economy, exports increase by 20. The value of the foreign
trade multiplier would be:
a.
4.75
b.
4.35
c.
5.21
d.
3.89
e.
3.57.
Part-II
Income Determination Model: Money and Interest

240. Given the following relations and parameters:
04
04
20
04
B
W
M
AC
o.
ef
.N
R
27
02
431
1-
:8
s.
Al
lr
ig
ht
re
The value of the Interest rate (i) is:

a. 0.15%
b. 0.10%
c. 0.12%
d. 0.18%
e. 0.13%.
BN
= 150 80i
= 300
= 0.3Y
= 120 160i
.IS
I
Ms
Mt
Ma
ed
= 120 + 0.6Y
se
rv
= 40 + 0.25Yd
=YT
= 0.20Y
= 120 12i
= 80
= 60
= 0.1Y
= 6Y 2,200i
= 2,800
-4
Savings function
(S)
Tax function
(T)
Exports
(E)
Imports
(M)
Demand for Money (Md)
Money supply
(Ms)
a. 596.48
b. 587.35
c. 578.45
d. 591.84
e. 588.67.
241. Given the following information:
Pr
es
242.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Consumptions function C
Tax function
T
Disposable income
Yd
Investment
I
Government expenditure G
Precautionary demand for money (Mp)
Transaction demand for money (Mt)
Speculative demand for money (Ma)
Supply of Money
(Ms)
= 100 + 0.75Yd
= 0.20Y
=YT
= 50 12i
= 200
= 20 + 0.1Y
= 0.20Y
= 130 30i
= 300
The volume of GNP is:

a. 785.8
b. 784.3
c. 788.6
d. 774.9
e. 775.8.
153
Macroeconomics
= 0.22Y
= 10 11i
= 320
= 0.1Y
= 118
Exports ( E )
Nominal GNP in 1991-92
The GNP deflator for the year 2002-03 is:
04

Money Supply
(Ms)
Import function (M)
20
= 600
04
Government expenditure ( G )
04
243. The following are the economic indicators for the year 2002-03.
Savings function
(S)
= 70 + 0.20Yd
=YT
Tax function
(T)
= 0.25Y
Investment demand function (I)
= 300 10i
M
AC
= 3,472
164.3
e.
164.7.
ef
.N
R
166.5
d.
-4
c.
27
167.5
02
b.
4-
163.3
31
a.
o.
(Base year 1981-82; GNP deflator was 100)
.IS
BN
= 40+0.80Yd
=YT
= 0.2Y
= 5 + 0.1Y
= 100
= 100 120i
= 300
= 0.24Y
= 220
= 150 10i
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed

Tax function
(T)
Import function
(M)
Exports
(E)
Money supply
(Ms)
The velocity of money in the economy is:
a. 2.38
b. 2.32
c. 2.51
d. 2.25
e. 2.56.
:8
1-
244.
20
04
245.
154
The IS curve is 2,400 40i

=Y
Transaction demand for money = 0.20Y
Speculative demand for money = 400 50i
Money supply
= 600
If transaction demand for the money changes to 0.25Y, the decrease in equilibrium income
will be:
a. 75.5
b. 76.8
c. 74.3
d. 73.8
e. 73.5.
Part-II
246.
= 40 + 0.2Yd
=YT
Tax function (T)
= 0.21Y
Investment demand function (I)
= 200 10i
Import function (M)
= 5 + 0.1Y
Exports (E)
= 0.12Y
Government expenditure ( G )
= 300
= 0.24Y
= 100 20i
Supply of money (Ms)
= 300
04
20
04
04
(S)
Decrease in private investment by 35
c.
Increase in private investment by 38
d.
Decrease in private investment by 28
e.
Increase in private investment by 32.
b.
-4
Increase in private investment by 30
:8
1-
31
4-
02
27
a.
ef
.N
o.
If supply of money is decreased to 220, the impact on private investment.
M
AC
Savings function
BN
247. The following are the equations for LM and SM curves.
.IS
800 = 0.4Y + 8i
se
rv
ed
600 = 0.4Y 10i
e.
215.
208
ht
d.
ig
206
lr
c.
s.
Al
216
Pr
es
b.
ty
210
ve
rs
i
a.
re
If the exogenous investment increased by 150. The change in equilibrium will be:
ni
fa
iU
Commodity equilibrium in real terms is
Th
e
Ic
Y = 640 + 0.40Yd 4000i
20
04
The equation for monetary equilibrium is

Y = 410 + 5Ms + 1000i and
Equilibrium in the labor service market exists at a 600 real income level.
248. At what price level is there simultaneous equilibrium in all markets?

a.
1.09.
b.
1.56.
c.
1.05.
d.
1.87.
e.
1.12.
155
Macroeconomics
249. At what real income level is there equilibrium in the commodity and money markets if the
nominal, money supply is 200, the price level is 1, and the household sectors nominal
disposable income is 500?
a.
672.
b.
640.
c.
645.
d.
678.
e.
664.
04
04
250.
I = 250 200i
Investment function
T = G = 24
Government expenditure.
Mt = 0.25Y
Transaction demand for money
Ma = 134 500i
Speculative demand for money
Ms = 250
Money supply.
27
-4
ef
.N
o.
M
AC
04
20
C = 60 + 0.75 Yd
28.
e.
24.
31
d.
1-
26.
:8
c.
BN
22.
.IS
b.
ed
20.
re
251. Consider the following functions:
se
rv
a.
4-
02
If there is a decline of 75 in money supply, what will be the changed equilibrium level of
investment?
ig
ht
S = 250 + 0.2Y
s.
Al
lr
M = 0.15Y
500.
b.
525.
c.
515.
Ic
fa
iU
ni
a.
ve
rs
i
ty
Pr
es
Where S is aggregate saving, M is imports, and Y is national product. If the private gross
domestic investment increases by 250 units and government spending decreases by 75 units,
by what tune the national income will increase?
475.
e.
490.
20
04
Th
e
d.
252. Consider the following relationships:

Saving function
(S)
Taxes
(T)
Demand for money (L)
Money supply
156
M

p
=
=
=
=
=
120 + 0.25Yd
420 10i
150
150
0.20Y 5i
300
Part-II
The value of equilibrium income is:

a. 1,815.6
b. 1,811.5
c. 1,816.5
d. 1,812.4
e. 1,815.4.
253. Given the following macroeconomic relationships, the value of interest rate is:
04
04
20
300
1-
.IS
BN
:8
120 + 0.25Yd
300 5i
150
240
0.20Y 5i
300
lr
ig
ht
re
M

p
Money supply
=
=
=
=
=
=
se
rv
254. Consider the following relationships:

Saving function
(S)
Investment function
(I)
Taxes
(T)
Demand for money
(L)
31
4-
02
27
-4
ef
.N
o.
7.53%
7.90%
8.23%
8.35%
7.33%.
ed
a.
b.
c.
d.
e.
04
M
=
p
Money supply
120 + 0.25Yd
300 5i
150
150
0.20Y 5i
=
=
=
=
=
(S)
(I)
(T)
(G)
(L)
M
AC
Saving function
Investment function
Taxes
Demand for money
1,875
c.
1,884
d.
1,848
e.
1,857.
Pr
es
b.
ty
1,868
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
20
04
Th
e
Disposable income
Tax function
Investment function
Exogenous Govt. expenditure
Supply of money
Exports
Import function
(C) =
(Yd) =
(T) =
(I) =
(G) =
(Mt) =
(Ma) =
(Ms) =
(E) =
(M) =
15 + 0.80Yd
YT
0.25Y
450 12i
300
0.20Y
145 60i
300
225
5 + 0.2Y
157
:8
1-
31
4-
02
27
-4
ef
.N
o.
04
20
04
B
W
M
AC
255. The value of equilibrium income is:

a. 1,588
b. 1,580
c. 1,578
d. 1,590
e. 1,598.
256. The equilibrium trade balance is:
a. 98.3
b. 98.5
c. 98.9
d. 97.6
e. 97.1.
257. In a two-sector economy, saving function and investment function given by:
S
= 50 + 0.25Y
I
= 65 220i
Where Y is the output and i is the rate of interest and it is 10%.
The equilibrium level of output is:
a. 375
b. 372
c. 364
d. 368
e. 380.
04
Macroeconomics
ed
0.25Y + 220i = 115

0.15Y
75 225i
500
re
se
rv
=
=
=
=
ig
ht
Equilibrium in goods market

The money supply
.IS
BN
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
258. Value of the equilibrium rate of interest is:

a. 0.980
b. 0.984
c. 0.988
d. 0.989
e. 0.997.
259. The level of output for the economy is:
a. 4,328
b. 4,458
c. 4,567
d. 4,724
e. 4,456.
IS curve: 500 = 0.5Y + 6i
LM curve:400 = 0.5Y 14i
Where Y is income and I is the rate of interest in percent.
158
04
20
04
27
-4
ef
.N
o.
M
AC
260. The value of interest i is:

a. 6
b. 10
c. 5
d. 3
e. 9.
261. The IS curve is given by:
Y =
850 2500i (equilibrium in the goods market)
Y =
500 + 5m + 1000i (equilibrium in the money market)
Where m is money supply and i is the interest rate.
Full employment exists at the real income level of 550.
The nominal supply is 200 and current price level is 1.
The price level at which there will be simultaneous equilibrium in both markets is:
a. 1.073
b. 1.071
c. 1.079
d. 1.075
e. 1.078.
04
Part-II
re
31
1-
:8
BN
.IS
lr
ig
50 + 0.2Yd
YT
.25Y
00 10i
400
0.25Y
125 50i
250
ed
se
rv
(S) =
(Yd) =
(T) =
(I) =
(G) =
(Mt) =
(Ma) =
(Ms) =
ht
Savings function
Disposable income
Tax function
Investment demand function
Government purchase
Supply of money
4-
02
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
262. The equilibrium income is:

a. 1,600
b. 1,475
c. 1,500
d. 1,550
e. 1,625.
263. If the government expenditure increases by 135, The crowding out of private investment
would be:
a. 15
b. 18
c. 21
d. 11
e. 10.
264. If the government does not want to crowd-out private investment and it increases its
expenditure by 135, calculate the increase in Money supply.
a. 85.67
b. 84.95
c. 84.76
d. 85.75
e. 84.38.
159
Macroeconomics

C = 20 + 0.75Yd
Yd = Y T
T = 0.2Y
I = 500 15i
G = 400
M = 10 + 0.1Y
E = 260
Mt = 0.25Y
Ma = 125 50i
Ms = 250
04
20
04
04
Disposable income
Tax function
Investment function
Import function
Export function
Transactions demand for money
Supply of money
9%
c.
6%
d.
8%
e.
10%.
b.
M
AC
7.5%
-4
ef
.N
o.
a.
265. The value of the interest rate:
e.
2,100.
02
2,265
4-
d.
31
2,230
1-
c.
:8
2,225
BN
b.
.IS
2,250
ed
a.
27
266. Calculate the equilibrium income.
se
rv
267. The value of the equilibrium trade balance is:

45
b.
40
c.
48
c.
43
d.
49.
Pr
es
s.
Al
lr
ig
ht
re
a.
368
b.
362
c.
389
20
04
Th
e
Ic
iU
a.
fa
ni
ve
rs
i
ty
268. If the exogenous government expenditure is increases by 115, the equilibrium investment
will be:
d.
365
e.
367.
269.
C = 20 + 0.75Yd
Yd = Y T
T = 0.2Y
I = 500 15i
G = 515
M = 10 + 0.1Y
E = 260
160
Disposable income
Tax function
Investment function
Import function
Export function
Part-II
Mt = 0.25Y
Ma = 125 50i
Ms = 250

Supply of money
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
C = 80 + 0.75Yd
Yd = Y Tx
Disposable income
I = 300 200i
Investment function
T x = G = 30
Govt. expenditure
Mt = 0.30Y
Ma = 150 300i
Ms = 270
Supply of money
the value of equilibrium investment is:
a. 175
b. 179
c. 172
d. 173
178.
ed
e.
.IS
BN
:8
1-
270.
20
04
04
If to keep the equilibrium investment as it is (at an interest rate of 8%), to what extend money
supply should be increased?
a. 307.5.
b. 305.8.
c. 305.2.
d. 306.8.
e. 307.9.
s.
Al
lr
ig
ht
re
Disposable income
Investment function
Govt. expenditure
Supply of money
ve
rs
i
ty
Pr
es
C = 60 + 0.75Yd
Yd = Y Tx
I = 250 200i
T x = G = 24
Mt = 0.25y
Ma = 150 300i
Ms = 250
se
rv
271.
20
04
Th
e
Ic
fa
iU
ni
What is the equilibrium investment?

a. 198.
b. 187.
c. 195.
d. 192.
e. 190.
272. The value of equilibrium income.
C = 60 + 0.75Yd
Yd = Y Tx
I = 250 200i
T x = G = 24
Mt = 0.25y
Ma = 134 500i
Ms = 200
Disposable income
Investment function
Govt. expenditure
Supply of money
161
Macroeconomics
a.
b.
c.
d.
e.
1567
1543
1598
1552
1563.
273.
o.
M
AC
04
20
04
What will be the quantity of money available for speculative balance at income level 700?
a. 115.
b. 110.
c. 113.
d. 109.
e. 100.
04
Money supply = 250

Transaction precautionary demand for money = 0.20Y
The speculative demand for money = 150 500i
ef
.N
274.
27
-4
Money supply = 300

Transaction precautionary demand for money = 0.25Y
The speculative demand for money = 150 500i
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
The quantity of money available for speculative balance at income level 900 will be:
a. 25
b. 30
c. 32
d. 24
e. 29.
275. Equilibrium in the commodity market
Y = 850 2500i (IS Curve)
Equilibrium in the money market
Y = 500 + 5m + 1000i (LM curve)
m represents money supply and i represents interest rate. Full employment exists at 650
real income level. If the nominal supply is 200 and the price level is 1, the price level at
which simultaneous equilibrium on all markets is:
a. 0.934
b. 0.921
c. 0.923
d. 0.918
e. 0.912.
162
Savings function
(S)
Tax function
(T)
Private investment function (I)
720 + 0.3Yd
YT+R
0.2Y
20 + 0.10Y
200
Exogenous Govt. expenditure (G)
=
=
=
=
=
Transfer payments
(R)
= 50
Exports
(E)
= 25
Import function
(X)
= 0.05Y
Part-II
Mt
= 0.25Y
Ma
= 250 10r
Ms
e.
262.82.
04
20
04
B
W
M
AC
o.
ef
.N
02
4-
236.92
31
d.
1-
263.44
:8
c.
BN
262.35
.IS
b.
ed
262.85
se
rv
a.
27
e. 104.591.
278. The budget surplus at equilibrium level of income is:
276. The equilibrium level of income is:

a. 2564.45
b. 2563.10
c. 2568.90
d. 2564.10
e. 2365.05.
277. The trade balance at the equilibrium level of income would be:
a. 104.205
b. 103.205
c. 105.382
d. 103.515
04
= 600
-4
Supply of money
re
ht
ig
lr
s.
Al
(R)
Pr
es
Transfer payments
(S)
(Yd)
Savings function
Disposable income
ve
rs
i
ty
Tax function
(T)
ni
420 + 0.2Yd + 6i
YT+R
100
=
=
=
0.2Y
0.2Y 20i
2000
(M)
0.1Y
Exports
(E)
1400
Mt
0.15Y
Ma
Speculative demand for Money
225i
450
Ic
fa
iU
Import function
Th
e
20
04
=
=
=
Supply of Money
Ms
279. The economic relationships is:

a. 9575
b. 9573
c. 9586
d. 9623
e. 9873.
163
:8
1-
31
4-
20 + 0.25Yd
YT
40 + 0.2Y
240 10i
300
10 + 0.10Y
BN
=
=
=
=
=
=
se
rv
ed
.IS
Savings function
(S)
Disposable income
(Yd)
Tax function
(T)
Investment function
(I)
Import function
(M)
02
27
-4
ef
.N
o.
04
20
04
B
W
M
AC
280. The value private investment of:

a. 2750
b. 2783
c. 2850
d. 2700
e. 2782.
281. The value of demand for money is:
a. 455
b. 450
c. 432
d. 438
e. 160.
282. The value of trade balance at equilibrium is:
a. 32
b. 46
c. 28
d. 26
e. 25.
04
Macroeconomics
200
Mt
0.2Y
Ma
50 16i
250
Exports
ni
ve
rs
i
Money supply
ty
Pr
es
s.
Al
lr
ig
ht
re
(E)
Th
e
Ic
fa
iU
283. The value of Equilibrium level income is:

a. 1445
b. 1449
c. 1448
d. 1452
e. 1465.
284. The trade balance of Budget deficit is:
a. 50.2
b. 50.4
c. 52.6
d. 52.3
e. 51.5.
20
04
Ms
164
Part-II
285. The value of equilibrium level of income when the exogenous govt. expenditure increases by
50 is:
a. 1,528
b. 1,576
c. 1,448
d. 1,450
e. 1,520.
=
=
60 + 0.25Yd
YT+R
Transfer payments
(R)
80
(I)
=
=
0.2Y
1000 15i
800
Import function
20 + 0.1Y
400
Mt
0.2Y
Ma
130 44i
Ms
Money Supply
04
B
W
M
AC
o.
ef
.N
02
27
-4
(E)
4-
Exports
(M)
:8
1-
31
Tax function (T)

Investment function
04
(S)
(Yd)
20
Savings function
Disposable income
04
ed
.IS
BN
450
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
286. The value of Equilibrium income of the economy is:

a. 4520
b. 4482
c. 4240
d. 4895
e. 4350.
287. The value of Trade Balance is:
a. 48
b. 46
c. 49
d. 40
e. 44.
288. The value of budget deficit is:
a. 35
b. 32
c. 36
d. 41
e. 48.
165
Macroeconomics
289. If the government expenditure increases by 125, The equilibrium income would be:
a. 4462
b. 4469
c. 4460
d. 4486
e. 4468.
(S)
(Yd)
= 25 + 0.25Yd
=YT+R
Transfer payments
(R)
= 40
Tax function
Private investment function
(T)
(I)
= 0.2Y
= 500 15i

Import function
(G)
(M)
= 400
= 10 + 0.1Y
Exports
(E)
= 225
04
B
W
M
AC
o.
ef
.N
= 0.25Y
Ma
= 125 504i
Ms
.IS
BN
= 250
:8
1-
31
4-
02
27
-4
Mt
Money supply
20
04
Savings function
Disposable income
04
2200
e.
2275.
re
d.
2125
ht
c.
ig
2250
lr
b.
s.
Al
2100
Pr
es
a.
se
rv
ed
290. The value of the equilibrium income in the economy is:
6.3
b.
2.8
c.
5.2
Ic
fa
iU
ni
a.
d.
5.0
e.
4.8.
Th
e
20
04
ve
rs
i
ty
291. The value of the Trade Balance at equilibrium in the economy is:
292. The value of the budget deficit at the equilibrium in the economy is:
166
a.
22
b.
26
c.
28
d.
21
e.
20.
Part-II
293.
25 + 0.25Yd
YT+R
(R)
40
0.2Y
500 15i
Exogenous Gov. expenditure (G)
745
Import function
(M)
10 + 0.1Y
Exports
(E)
225
Mt
0.25Y
Ma
125 504i
Ms
Money supply
250
04
20
W
M
AC
o.
ef
.N
R
-4
31
2800
1-
d.
:8
2700
BN
c.
.IS
2735
ed
b.
se
rv
2750
4-
The value of the equilibrium income is:

a.
04
(T)
02
Tax function
27
Transfer payments
(S)
04
Savings function
ht
re
e. 2725.
lr
s.
Al
Pr
es
Disposable income
ve
rs
i
ty
Transfer payments
Tax function
(S)
60 + 0.2Yd
(Y )
YT+R
(R)
50
0.1Y
250 + 0.1Y 35i
400
ig
Savings function
(T)
ni
fa
iU

(M)
20 + 0.1Y
Exports
(E)
250
Mt
0.2Y
Ma
120 40i
300
20
04
Th
e
Ic
Import function
Money Supply
Ms
167
Macroeconomics
294. The value of equilibrium income in the economy is:

a.
2500
b.
2450
c.
2630
d.
2655
e.
2525.
d.
16
e.
20.
04
22
20
c.
04
18
b.
25
M
AC
a.
04
295. The value of the Trade balance at equilibrium is:
e.
220.
ef
.N
200
d.
-4
230
27
c.
02
226
4-
b.
31
289
1-
a.
o.
296. The value of Budget surplus at equilibrium is:
2875
.IS
d.
ed
2850
se
rv
c.
re
2900
b.
ht
2950
ig
a.
BN
:8
297. If the exogenous government expenditure is increases by 182, the value of the equilibrium
income in the economy will be:
Pr
es
s.
Al
lr
e. 2975.
=
=
=
=
400 + 0.8Yd 20i

20 + 0.15Y 60i
Y+RT
0.1Y
(R)
200
Import function
(M)
15 + 0.12Y
Exogenous Exports
(E)
800
500
400
Mt
0.25Y
Ma
110 145i
fa
iU
ni
ve
rs
i
ty
(S)
Disposable income
(Yd)
Tax function
(T)
20
04
Th
e
Ic
Transfer payments

Money Supply
168
Ms
Part-II
298. The value of equilibrium level of income is:

a.
5220
b.
5375
c.
5420
d.
5470
e.
5275.
299. The value of Trade Balance at equilibrium is:

158.73
b.
158.60
c.
159.43
d.
159.60
e.
157.98.
M
AC
04
20
04
04
a.
e.
160.
ef
.N
178
d.
-4
145
27
c.
02
163
4-
b.
31
158
1-
a.
o.
300. The value budget deficit at the equilibrium in the economy is:
d.
21
ed
27
se
rv
c.
re
29
b.
ht
24
ig
a.
.IS
BN
:8
301. If the exogenous government expenditure increases by 225, The change in private investment
will be:
Pr
es
s.
Al
lr
e. 23.
(S)
(T)
=
=
502 + 0.20Yd
0.25Y
Transfer payments
(R)
60

Govt. expenditure (G)
Import function (M)
=
=
=
=
400 + 0.25Y 10i

YT+R
300
0.10Y
(E)
150
Ms
Money Supply
480
Mt
0.15Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Savings function
Tax function
Exports
Ma
=
P
30i
169
Macroeconomics
04
20
04
04
302. The value of equilibrium income is:

a. 5250
b. 5200
c. 5320
d. 5375
e. 5150.
303. The value of Trade Balance at equilibrium is:
a. 385
b. 342
c. 368
d. 375
e. 370.
M
AC
ef
.N
R
-4
27
BN
:8
1-
31
4-
02
15 + 0.8 Yd
450 12i
300 MUC
0.20Y
145 60i
300 MUC
225 MUC
0.25Y
5 + 0.2Y
.IS
C
I
G
Mt
Ma
Ms
E
T
M
ed
Investment function
Exogenous Government expenditure
Supply of Money
Exports
Tax function
Import function
o.
304. The following equations are given with respect to a hypothetical economy.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
The equilibrium interest rate in the economy is

a. 2.7 %
b. 7.2 %
c. 5.1 %
d. 5.8 %
e. 4.5 %.
305. If the demand for money is L = kY hi and the money supply is M , the money market
equilibrium is:
fa
Ic
Y = M+
c.
Y=
M
+ hi
k
d.
Y=
M hi
k
e.
Y=
hi M
.
k
Th
e
20
04
hi
k
b.
170
M + hi
k
ni
Y=
iU
a.
Part-II
306. For an economy, goods market equilibrium is:

0.5 Y = 3,125 25i.
If expansionary monetary polices decrease the rate of interest in the economy by one
percentage point, the equilibrium income will
Decrease by 25 MUC
b.
Increase by 25 MUC
c.
Decrease by 50 MUC
d.
Increase by 50 MUC
e.
Insufficient data.
20
04
04
a.
500 MUC.
e.
225 MUC.
o.
d.
ef
.N
190 MUC.
c.
-4
375 MUC.
27
b.
02
250 MUC.
4-
a.
M
AC
04
307. In an economy, the investment function is given by I = 2,500 100i. If an increase in

government spending by 625MUC increases the interest rate in the economy by 5%, what
could be the amount of crowding out in the economy?
i = 4% and Y = 580.
BN
e.
.IS
i = 10% and Y = 700.
ed
d.
se
rv
i = 7% and Y = 640.
re
c.
i = 5% and Y = 600.
ht
b.
ig
i = 3% and Y = 560.
lr
a.
:8
1-
31
308. The LM function is Y = 500 + 20i. Which of the following combinations of interest and
income does not represent equilibrium in the money market?
s.
Al
309.
Pr
es
Transaction demand for money (Mt) : 0.50Y
ve
rs
i
ty
Speculative demand for money (Ms) : 350 100i
ni
: 500 MUC
fa
iU
Supply of money (Ms)
: 200 10i
Th
e
Ic
Current equilibrium rate of interest : 8%
20
04
Tax rate
: 20%
If the expansionary fiscal policies increase the equilibrium rate of interest to 12% and IS
function to Y = 2,900 100i, what should be the money supply in the economy to avoid the
crowding out?
a.
500 MUC.
b.
550 MUC.
c.
600 MUC.
d.
675 MUC.
e.
750 MUC.
171
Macroeconomics
310. The IS function and LM function in an economy are estimated to be Y = 5,700 + 0.5Y - 100i
and Y = 5,200 + 800i respectively. The investment function in the economy is 1600 100i. If
the government spending increases by 100 MUC, which of the following is true about the
interest rate in the economy?
a.
Increases from 6.2 % to 6.5%.
b.
Increases from 6.1% to 6.5%.
c.
Increases from 6.2% to 6.4%.
d.
Increases from 6.0 % to 6.4%.
e.
None of the above.

250 + 0.30Yd
YT
Tax function (T)
0.25Y
100 11i
500 MUC
Exports (E)
40 MUC
20
ef
.N
o.
M
AC
04
04
04
311. The following relations are given for an economy:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Imports (M)
= 0.3Y
If the equilibrium output for the economy is to be increased by 100 MUC, investment should
be increased by
a. 60.0 MUC
b. 77.5 MUC
c. 70.0 MUC
d. 95.0 MUC
e. 90.5 MUC.
312. For an economy, the savings function is S = 300 + 0.2Y and the investment function is
I = 200 5i. If the equilibrium level of output is 2,250 MUC, interest rate in the economy is
a. 6%
b. 8%
c. 10%
d. 12%
e. 14%.
313. In an economy, demand for money is L = 0.4Y 10i and supply of money is 300 MUC. If
the government intends to decrease the equilibrium interest rate from the current level of 8%
to 6%, what will be the change in the equilibrium level of output?
a. 25 MUC Increase.
b. 50 MUC Decrease.
c. 75 MUC Decrease.
d. 50 MUC Increase.
e. No change in the equilibrium level of output.
Based on the following information answer questions 314 and 315.
LM function
172
Y = 500 + 200i
Investment function
(I)
200 10i
(Mt)
0.50Y
(Ma)
350 100i
Supply of money
(Ms)
500 MUC
Current equilibrium rate of interest
(i)
10%
Part-II
314. If expansionary fiscal policies increase the equilibrium rate of interest to 12%, the crowding
out in the economy is:
a.
10 MUC
b.
15 MUC
c.
20 MUC
d.
25 MUC
e.
30 MUC.
d.
700 MUC.
e.
750 MUC.
04
650 MUC.
20
c.
04
600 MUC.
b.
100 MUC.
M
AC
a.
04
315. If the government would like to avoid the crowding out as in the above question, what should
be the new money supply in the economy?
ef
.N
o.
316. The following relations are derived for an economy:
31
4-
02
27
-4
50 + .50Yd
YT+R
80 MUC
0. 40Y
1000 30i
800 MUC
20 + 0.20 Y
450 MUC
0.50Y
250 100i
500 MUC
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Savings Function
(S)
Disposable income
( Yd)
Transfer Payments
(R)
Tax function
(T)
Investment function
(I)
(G)
Import function
(M)
Export
(E)
(Mt / P)
(Ma / P)
Money supply
(Ms / P)
The equilibrium level of income in the economy is:
a. 1,875 MUC
b. 1,985 MUC
c. 2,062 MUC
d. 2,162 MUC
e. 2,281 MUC.
(All macro aggregates are in million units of currency and interest in terms of percent per annum)
20
04
Th
e
Ic
fa
Based on the following information answer questions 317 and 318.

The following relationship are given for an economy:
Goods market equilibrium
Money market equilibrium
Exports
Import function
0.5Y = 2925 37.5i

0.25Y = 312.5 + 125i
650 MUC
25 + 0.25Y
317. The trade balance at equilibrium in the economy is

a.
b.
c.
d.
e.
637.5 MUC (surplus)

667.5 MUC (surplus)
687.5 MUC (deficit)
687.5 MUC (surplus)
768.5 MUC (deficit).
173
Macroeconomics
= 120 + 0.6Y
= 150 80i
= 300
= 0.3Y
= 120 160i
a.
655
02
431
1:8
BN
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
C
I
Ms
Mt
Ma
b.
648
c.
662
d.
671
e.
640.
Th
e
20
04
s.
Al
lr
ig
ht
re
se
rv
The value of income is:

a. 750
b. 720
c. 830
d. 800
e. 825.
321. The equilibrium level of income is:
27
60 + 0.80Y,
116 2i,
0.20Y 5i and
120.
.IS
=
=
=
=
ed
Suppose C
I
L
M
-4
ef
.N
o.
M
AC
04
20
04
04
318. If the government expenditure increases by 475 MUC, the new equilibrium rate of interest
will be
a. 7.83%
b. 8.01%
c. 8.83%
d. 9.13%
e. 9.65%.
319. In the hypothetical economy,
IS curve is
= 2,500 40i = Y
= 0.25Y
= 450 50i
Money supply
= 750
a. 2,462
b. 2,557
c. 2,325
d. 2,284
e. 2,175.
320. In a two sector economy,
322. The IS and LM curves for an economy are given below.

650 = 0.6Y + 8i
520 = 0.6Y + 18i
Where, Y is income and i is interest rate. If the exogenous government expenditure increases
by 120 what will be the new equilibrium income?
174
a.
1,253.
b.
1,132.
Part-II
c.
1,245.
d.
1,268.
e.
1,250.
323.
C
= 120 + 0.6Y
= 150 80i
Ms = 300
20
04
B
W
27
-4
ef
.N
o.
M
AC
Calculate the transaction demand for money?

a. 194.80.
b. 196.50.
c. 195.45.
d. 195.30.
e. 196.10.
The following relations have been estimated for an economy:
04
04
Mt = 0.3Y
Ma = 120 160i
75 + 0.80 Yd consumption
Yd
Y T disposable income
0.15Y tax function
150 16i investment function
31 exogenous government expenditure
Md =
80Y 2400i demand for money function
se
rv
ed
.IS
BN
:8
1-
31
4-
02
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Ms = 3,200 exogenous money supply

324. The Budget surplus of the government is:
a. 18.6
b. 17.25
c. 16.7
d. 18.5
e. 17.75.
325. The value of equilibrium income when the government expenditure increases to 63 is:
a. 375.40
b. 342.45
c. 362.50
d. 358.40
e. 365.75.

326. If the government expenditure increases by 60, the value of equilibrium income is:
a.
5450
b.
5400
c.
5475
d.
5650
e.
5625.
175
Macroeconomics

= 0.64
Intermediation ratio
Financial interrelations ratio
Net capital formation
= 0.72
= 1.21
= 98,667.3
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
.IS
se
rv
330.
ed
327. The amount of Total Issues is:

a. 1,19,387.4
b. 1,18,574.5
c. 1,18,250.5
d. 1,19,457.6
e. 1,17852.5.
328. The amount of Primary Issues is:
a. 63,247.1
b. 62,525.5
c. 62,425.5
d. 63,147.1
e. 63,725.7.
329. The amount of Secondary Issues is:
a. 45,446.92
b. 44,569.06
c. 44,737.82
d. 45,659.20
e. 45,465.91.
04
New issue ratio
19x2
93,102.10
10,201.00
5,203.01
1,301.32
11,021.01
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Particulars
19x1
NNP at market price
89,405.30
Indirect taxes
9,782.00
Subsidies
4,313.02
Direct taxes
1,202.11
Secondary issues:
9,031.12
Issue of financial institutions
Primary issues:
Issues of non-financial sector
Domestic sector
4,051.11
GDR
6,021.01
ADR
452.04
16,420.01
(Net physical asset)
The percentage in the Finance Ratio is:
a. 5.2%
b. 5.4%
c. 6.1%
d. 6%
e. 4.8%.
176
5,035.92
5,016.00
562.04
17,421.03
Part-II
331.
20
04
04
Rs. in Crores
620
60
950
875
222
421
40
72
42
60
120
04
Particulars
Share capital
Reserve funds
Credit to state government
Credit to government
Deposits of banks
Credit to banks
Foreign exchange asset
Other non-monetary liabilities
Other assets
Government deposits
Government money
31
1-
The value of money multiplier
4-
02
27
-4
ef
.N
o.
M
AC
In the economy currency-deposits ratio is 0.3 and reserve ratio 0.10 is imposed by Central
Bank. The money supply is:
a. 5,321
b. 5,356
c. 5,317
d. 5,385
e. 5,346.
332. The following information in furnished:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
Particulars
Rs. in Crores
Net worth
740
1,420
Credit to bank
432
Credit to commercial sector
594
Foreign exchange assets
202
Other assets
114
Government deposits
42
Deposit of commercial banks
220
Money supply in economy
= 8,542
Reserve ratio imposed by Central Bank
= 7%
Government money
= 201
a. 3.9062
b. 3.4075
c. 3.6575
d. 3.9842
e. 3.9148.
333. From the below indicators find out New Issue Ratio for the year 2001 when secondary issue
are 14,000 and 16,000 respectively for the years.
Particulars
2001 2002
Finance ratio
0.32 0.30
0.82 0.79
Financial interrelation ratio 1.24 1.22
a. 0.621
b. 0.653
c. 0.681
d. 0.635
e. 0.679.
177
Macroeconomics
334.
Particulars
2001
2002
Finance ratio
0.31
0.29
Financial interrelation ratio
0.78
0.80
1.24
1.18
d.
382
e.
431.
04
445
20
c.
04
341
b.
275
M
AC
a.
04
Find out the change in indirect tax when NNP at Market price are Rs.75,000 and Rs.85,000
respectively and there are no subsidies. The primary issue in 1981 and 1982 are Rs.10,000
and Rs.11,000, respectively.
1.22
1.32
0.82
0.94
:8
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Primary Issue in 2002

= 14,000
NNP at Factor cost in 2001 = 85,000
The NNP at FC is increased in 2002 by 12%
Calculate the new issue ratio for 2001.
a. 0.65
b. 0.67
c. 0.71
d. 0.64
e. 0.68.
1-
31
= 12,000
BN
Secondary issues in 2001
ef
.N
28.5%
25.69%
-4
Finance ratio
27
2002
02
2001
4-
Particulars
o.
335. The following data is given:
ve
rs
i
ty

2001
25.69%
1.22
0.82
Secondary issues in 2001
= 12,000
Primary issue in 2002
= 14,000
20
04
Th
e
Ic
fa
iU
ni
Particulars
Finance ratio
New issue ratio
2002
28.5%
1.32
0.68
NNP at factor cost in 2001 = 85,000

The NNP at FC is increased in 19x2 by 12%.
336. The net capital formation for the year 2002 is:
178
a.
20,567
b.
20,547
c.
20,588
d.
20,675
e.
20,450.
Part-II
337. The total issue for the year 2002 is:

a.
27,184
b.
27,176
c.
27,458
d.
27,750
e.
27,635.
338. The Intermediation Ratio for the year 2002 is:

0.94
b.
0.98
c.
0.87
d.
0.85
e.
0.89.
M
AC
04
20
04
04
a.
339.
31
4-
02
27
-4
ef
.N
o.
Rs. in Crores
500
150
140
80
60
162
1-
Particulars
Consumption (C)
Investment (I)
Exports (E)
Imports (M)
Money Supply (Ms)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
The velocity of money in the economy is:

a. 3
b. 6
c. 9
d. 7
e. 5.
340. In an economy monetary liability of RBI is Rs.10,000 and government money is Rs.2,000.
The currency/deposit ratio is known to be 0.33. The Central Banks money supply target is
Rs.45,000.
The reserve ratio that RBI must impose on banks to achieve money supply is:
a. 0.028
b. 0.025
c. 0.036
d. 0.058
e. 0.061.
20
04
341.
Reserve with the Central Bank

= 4,000
Volume of demand deposits
= 16,000
= 25%
If the volume of reserves is decreased by Rs.600 and volume of demand deposits increased
by Rs.1,000, the new reserve ratio will be:
a.
0.35
b.
0.4
c.
0.2
d.
0.6
e.
0.1.
179
Macroeconomics
342. The following information is given:

Particulars
Currency with the public
Deposit money of the public
Total post office deposits
Time deposits with bank
Post office savings bank deposits
Rs. in Crores
1,000
400
300
300
200
d.
1,700
e.
1,400.
04
1,800
20
c.
04
1,750
b.
1,650
M
AC
a.
04
The value of M3 is:
R
-4
27
02
431
1:8
.IS
BN
Rs. in Crores
800
40
20
140
400
20
1,400
600
ed
Particulars
Net worth
Other assets
Government deposits
Credit to banks
ef
.N
o.
343.
96.75.
95.25
e.
ht
d.
ig
90.10
lr
c.
s.
Al
94.50
Pr
es
b.
ty
99.76
ve
rs
i
a.
re
se
rv
The currency deposit ratio in the economy is 0.3 and reserve ratio is 5%, that should be the
amount of government money the economy to have a money supply of 5,942 is:
ni
20
04
Th
e
Ic
fa
iU
Particulars
2001
89,405.30
Indirect taxes
9,782.00
Subsidies
4,313.02
Direct taxes
1,202.11
Secondary issues
9,031.12
Issues of financial institutions
Primary issues of non-financial sector
Domestic sector
4,051.11
GDR
6,021.01
ADR
452.04
16,420.01
(Net physical assets)
180
2002
93,102.01
10,201.00
5,203.01
1,301.32
11,021.01
5,035.92
5,016.00
562.04
17,421.03
Part-II
344. Percentage change in new issue ratio.

a.
4.8
b.
3.6
c.
4.2
d.
5.6
e.
4.6.
345. Calculate the percentage change in Intermediation ratio.

23%
b.
21%
c.
22%
d.
19%
e.
18%.
M
AC
04
20
04
04
a.
14,000.
1-
e.
:8
22,000
BN
d.
.IS
18,000
ed
c.
se
rv
16,000
re
12,000
b.
31
346. The value of money supply in the economy is:

a.
27
-4
Rs.4,000 Crore currency units

Rs.1,000 Crore currency units
0.4
0.10
02
=
=
=
=
4-
The currency with the public

Banks reserves
The currency deposit ratio
Central Banks reserve ratio
ef
.N
o.
In an economy,
c.
0.3540.
d.
0.3340.
e.
0.3258.
Pr
es
0.2365.
ty
0.2285.
b.
fa
iU
ni
ve
rs
i
a.
s.
Al
lr
ig
ht
347. The currency deposit ratio changes to 0.2. If the Central Bank wants to maintain the money
supply at the present level (14,000) by changing the reserve ratio, what will be the new
reserve ratio?
20
04
Th
e
Ic

Finance ratio
New issues ratio
:
:
:
:
0.25
1.60
0.85
0.88
The National income of the economy is 96,000 Million units of currency.

348. Find out the total issues.
a.
25,000
b.
24,000
c.
22,300
d.
25,750
e.
23,250.
181
Macroeconomics
349. Compute net capital formation.

a.
16,000
b.
12,500
c.
19,000
d.
11,000
e.
15,000.
12,750
d.
14,200
e.
15,500.
04
c.
20
13,450
04
b.
11,500
a.
04
350. Calculate the new issues.
11,220
e.
12,250.
o.
d.
ef
.N
11,280
c.
-4
12,750
27
b.
02
12,460
4-
a.
M
AC
351. Calculate secondary issues.
1-
31
:8
Item
8,985
.IS
BN
Secondary issues: Issues of financial institutions.
Amount (Rs in Crores)
ed
Primary issues: Issues of non-financial sectors
se
rv
Domestic sector
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
ht
352. The value of Intermediation ratio is:

a. 0.84
b. 0.89
c. 0.93
d. 0.76
e. 0.78.
353. The value of new issue ratio is:
a. 0.71
b. 0.82
c. 0.83
d. 0.79
e. 0.77.
354.
The stock of high-powered money (H) : 18,950
The Currency Deposit Ratio
: 0.5
The reserve ratio
: 0.1
20
04
ig
s.
Al
National income
lr
re
Rest of the world
182
9,760
835
13,680
98,865
Part-II
If the Central Bank purchases government securities worth Rs.8,970, The increase in money
supply will be:
a. 21,485
b. 22,470
c. 22,425
d. 21,875
e. 23,105.
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
Item
Million Units of Currency
15
1,780
Credit to banks
410
Government deposits
21
11
Net worth
510
Other assets
78
112
The currency deposit ratio is 0.3
Reserve ratio is 4%
The government money is considered to be negligible.
355. The money supply in the economy is:
a. 7,125
b. 7,085
c. 7,250
d. 7,158
e. 7,060.
356. If the Central Bank wants to reduce the money supply 18%, The value new reserve ratio is:
a. 12.80%
b. 12.20%
c. 11.25%
d. 11.46%
e. 13.25%.
04
ve
rs
i
iU
ni
The following balances have been taken from the Balance Sheet of the Central Bank of an economy:
20
04
Th
e
Ic
fa

125
Bank deposits
50
Government deposits
20
1,000
Net worth
50
Other assets
25
1,750
750
Credit to banks
500
The currency deposit ratio has been ascertained as 34%. The amount of government money is
5 million units of currency. Total money supply in the economy is 6,000 million units of
currency.
183
Macroeconomics
357. The Reserve Ratio is:

a.
10.6%
b.
11.2%
c.
10.9%
d.
11.5%
e.
9.8%.
04
358. There is an increase in Central Bank credit to government by 550 million units of currency.
But the Central Bank desires to contain the money supply at the original level and for this
purpose it alters the reserve ratio. The new reserve ratio is:
24
b.
26
c.
21
d.
23
e.
25.
M
AC
04
20
04
a.
-4
: 1.60
27
02
: 0.65
4-
31
: 0.30
1-
Finance ratio
ef
.N
o.
359. The following indicators of financial development for an economy are available for the year
2000.
15,400.75.
.IS
e.
ed
15,350.75
se
rv
d.
re
15,468.75
c.
ht
15,725.75
ig
b.
lr
15,565.75
s.
Al
a.
BN
:8
The value of net capital formation for the year 2000 if the new issues for the year is 15,000
(Million units of currency) is:
b.
1,600
c.
1,450
d.
1,750
ni
iU
fa
Ic
Th
e
e.
ty
1,500
ve
rs
i
a.
Pr
es
360. On a given day the stock of high-powered money is 1,000. The currency-deposit ratio is 0.8
while the reserve ratio is 0.2. The money supply is:
1,800.
20
04
361. If the currency deposit ratio is 1.2 and the reserve ratio 0.10, the value of the money
multiplier is:
184
a.
1.63
b.
1.69
c.
1.72
d.
1.75
e.
1.65.
Part-II
362. The following balances have been taken from the Balance Sheet of the Central Bank of an
economy.
04
04
20
Credit to bank
Government deposits
Net worth
Other assets
04
Million units
of currency
500
200
10
5
250
50
7
4-
02
27
-4
ef
.N
o.
M
AC
You may assume government money to be negligible and hence can be ignored.
The Central Bank imposes a reserve ratio of 5%. If the money supply in the economy is 1957
million units of currency, the currency-deposit ratio in the economy is:
a. 30%
b. 32%
c. 36%
d. 28%
e. 29%.
re
se
rv
ed
.IS
BN

700
300
20
50
200
10
400
20
10
ty
Pr
es
s.
Al
lr
ig
ht
Particulars
Credit to Government
Credit to banks
Government deposits
Deposits of banks
Net worth
Other assets
:8
1-
31
363. The following balances have been taken from the balance sheet of the Central Bank of an
economy:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
Government money is negligible and hence can be ignored.

The currency-deposit ratio in the economy is 0.35 and the Central Bank wants to fix the total
money supply at 2,400 million. The reserve ratio that the Central Bank impose is:
a. 15%
b. 13%
c. 18%
d. 12%
e. 10%.
364. In an economy the currency with the public is 5,000 and banks reserves are 500. The
currency/deposit ratio is known to be 0.3; the Central Banks money supply target is 16,500.
The reserve ratio that the Central Bank must impose is:
a. .11
b. .18
c. .13
d.
.15
e.
.16.
185
Macroeconomics
Particulars
950
Credit to Bank
350
Government deposits
20
500
125
25
Other assets
65
04
04
Net worth
04
20
M
AC
The Currency/Deposit ratio has been ascertained as 0.20. The amount of government money
is 10 million units of currency. Total money supply in the economy is 4,000 million units of
currency.
ef
.N
o.
365. The reserve ratio imposed by the Central Bank is:

11%
b.
16%
c.
12%
d.
14%
e.
10%.
1-
31
4-
02
27
-4
a.
e.
390.
se
rv
320
re
d.
378
ht
c.
ig
360
lr
b.
s.
Al
345
Pr
es
a.
ed
.IS
BN
:8
366. If there is an increase of 100 million Central Bank credit to Government accompanied by
Government purchase of foreign exchange worth 10 million from the Central Bank, the
increase in money supply in the economy is:
iU
ni
ve
rs
i
ty
367. At a point of time, in an economy, high-powered money stock is 800 and narrow money
stock (M1) is 4,000. Currency deposit ratio is 0.2. If the Central Bank purchases government
securities worth 200 but does not want the money supply to change, the reserve ratio should
be increased by:
0.2
0.08
20
04
Th
e
Ic
b.
fa
a.
c.
0.3
d.
0.1
e.
0.5.
368. Assume that the ability of the commercial banking system to create demand deposits depends
only upon reserve requirement stipulated by the Central Bank. The following details are
available as on a date:
186
Reserves with the Central Bank
2,400
9,600
Reserve requirement
25%
Part-II
If the volume of reserves is decreased by 500 and the reserve requirement is lowered to 20%,
the demand deposits is:
a.
100
b.
120
c.
160
d.
125
e.
130.
369.
04
7,862.50
12,500.00
a. Domestic sectors
8,525.00
13,850.00
b. Rest of the world
725.00
1,775.00
04
Secondary Issues:
Issues of financial institutions
2002
04
2001
20
Particulars
ef
.N
o.
M
AC
Primary issues: Issues of non financial sectors
12,333.33
19,230.76
National income
95,404.16 1,21,456.75
27
-4
Net Capital Formation (Net physical asset)
4-
02
The intermediation ratio for the year 2001.

0.92
b.
0.88
c.
0.85
d.
0.95
e.
0.98.
se
rv
ed
.IS
BN
:8
1-
31
a.
re
370. The following are the indicators of financial development for an economy:
2002
0.28
0.25
1.75
1.20
0.75
0.70
ig
ht
2001
ve
rs
i
ty
Pr
es
s.
Al
lr
Finance ratio
iU
ni
(The above ratios are based on total figures pertaining to a year and not on the incremental
values.)
New issues
(Million units of currency)

2001
10,000
2002
12,000
20
04
Th
e
Ic
fa
Other relevant information is as follows:
The net capital formation for the year 2001 is:

a.
15,000
b.
18,000
c.
14,000
d.
11,000
e.
10,000.
187
Macroeconomics
Particulars
Deposits of banks with Central Bank
400
300
Currency issued by Central Bank
800
Net worth
400
250
Other assets
500
04
350
20
04
300
Government deposits
M
AC
420
04
1,080
Credit to banks
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
Government money is negligible and hence can be ignored. The currency-deposit ratio is
ascertained to be 0.2. The Central Bank has imposed a reserve ratio of 5%.
a. 7,250
b. 7,200
c. 7,800
d. 7,750
e. 7,450.
372. The Government approached the Central Bank for an additional credit of 500 million units of
currency. If the additional credit is provided, The increase in the money supply in the
economy would be:
a. 2,500
b. 2,650
c. 2,750
d. 2,300
e. 2,400.
373. The following information is available for an economy.
Income elasticity of demand for real balances
3.0
Acceptable rate of inflation
6%
Money multiplier
3
20
04
Th
e
Ic
fa
If the real GDP is desired to grow at 4%, the rate at which reserve money should grow would be:
a. 7.5
b. 4
c. 9
d. 6
e. 5.8.
The following are the indicators of financial development for an economy for the year 2000.
2000
Finance ratio
0.27
1.50
New Issues (Million units of currency)
188
0.75
90,000
Part-II
374. The secondary issues for the year 2000 is:

a.
65,400
b.
67,300
c.
67,500
d.
66,500
e.
68,750.
1,01,280
e.
1,06,570.
04
d.
20
1,05,750
04
c.
1,03,180
b.
M
AC
1,05,000
o.
a.
04
375. The value of net capital formation for the year is:
ef
.N
-4
The following are the indicators of financial development for an economy for the year 2001.
0.76
02
1.60
4-
31
0.33
BN
:8
1-
Finance ratio
27
2001
1,98,240
e.
10,57,280.
re
10,58,980
d.
ht
10,57,290
ig
c.
lr
10,56,280
s.
Al
b.
Pr
es
10,56,286
ty
a.
se
rv
ed
376. The national income for the year 2001is:
.IS
New Issues (million units of currency)
0.98
b.
0.96
20
04
iU
fa
Ic
Th
e
c.
ni
a.
ve
rs
i
377. The new issue ratio for the year 2001 is:
0.91
d.
0.89
e.
0.85.
378. In an economy the income elasticity of demand for real balances is 2.0 and the acceptable
rate of inflation is 5%. The real GDP is expected to grow at 5%, and money multiplier is 3.
The rate at which the reserve money should grow is:
a.
4.8%
b.
5.0%
c.
5.2%
d.
4.6%
e.
6.0%.
189
Macroeconomics
379.
Particulars
3,500
Government deposits
100
1,500
Deposit of banks (Reserves)
250
1,000
Net worth
2,000
100
50
04
Other assets
04
40
20
04
Credit to banks
M
AC
The currency-deposit ratio is ascertained to be 34%.
ef
.N
o.
The amount of government money is 10 million units of currency.
-4
The Central Bank wants to keep the total money supply in the economy at 12,000 million
units of currency by fixing the reserve ratio.
10.67%.
02
e.
4-
11.56%
31
d.
1-
12.80%
:8
c.
BN
11.26%
.IS
b.
ed
10.50%
se
rv
a.
27
The value of the Reserve Ratio is:
lr
s.
Al
Particulars
ig
ht
re
The following balances have been taken from the balance sheet of the Central Bank of an
economy.
400
ty
Credit banks
1,000
Pr
es
20
Other non-monetary Liabilities
10
500
100
iU
Net worth
fa
ni
ve
rs
i
Government deposits
20
04
Th
e
Ic

Other assets
70
14
The Currency-Deposit Ratio = 0.2

Reserve Ratio
= 5%
190
a.
5058.5
b.
5059.2
c.
5120.2
d.
5109.2
e.
5029.5.
Part-II
381. If the Central Bank wants to reduce the money supply by 20%, the new reserve ratio would be:
a.
12.50%
b.
11.75%
c.
12.80%
d.
11.25%
e.
12.20%.
382.
04
20
04
04
Year I
0.27
0.75
1.60
M
AC
Particulars
Finance ratio
Other information:
New issues
20,000
d.
14,450
ef
.N
16,750
c.
-4
14,550
27
b.
02
15,000
4-
a.
o.
Calculate secondary issues.
:8
1-
31
e. 15,600.
BN
383. Given the following information
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Particulars
19x1
Finance ratio
0.26
0.78
1.50
Other information:
New issues
24,000
The value of national income is:
a. 1,64,408.69
b. 1,65,480.75
c. 1,64,307.69
d. 1,63,235.76
e. 1,65,703.90.
384. Calculate the net capital formation from the above given financial indicators.
a. 21,435
b. 22,325
c. 20,750
d. 21,875
e. 20,925.
The following information pertaining to an economy is available:
Commodity market equation
5000 30i
Demand for money equation
0.3Y 300i
Current money supply in the economy
300 million units of currency
Income elasticity of demand for money
1.2
191
Macroeconomics
The following estimates are made for the next year:

Rate of inflation
5%
Rate of growth of real GDP
3.5%
In the economy the commercial banks charge nominal rate of interest which is 2% higher than
the equilibrium rate of interest.
327.6
c.
377.6
d.
358.5
e.
325.8.
04
b.
20
337.8
04
a.
04
385. The value of the expected stock of money is:
10.88%.
e.
M
AC
12.75%
o.
d.
ef
.N
10.25%
c.
-4
11.50%
11.25%
27
a.
b.
386. The cost of borrowing from the commercial banks is:
4-
02
re
se
rv
ed
.IS
BN
:8
1-
30,000
1,000
4,000
405
700
7,500
35,000
4,000
s.
Al
lr
ig
ht
Credit to banks
Government deposits
Net worth
Other assets
31
The following are the balances taken from the balance sheet of the Central Bank.
Pr
es
Government money is 5 million units of currency.

The Currency/Deposit ratio is 0.4 and the Central Bank has imposed a reserveratio of 10%.
ve
rs
i
ty

27,440
b.
26,570
iU
fa
d.
27,720
e.
26,980.
Th
e
20
04
28,480
Ic
c.
ni
a.
388. The Central Bank provides an additional credit of 250 million units of currency to the
government through adhoc purchase of treasury bills, out of which the government
immediately used 50 millions for purchase of foreign exchange from the Central Bank.
The increase in money supply in the economy would be:
192
a.
580
b.
620
c.
560
d.
610
e.
635.
Part-II
389. The following monetary data on financial development of an economy has been obtained for
the year 1998.
New issues ratio
0.74
Net Physical Capital Formation
2,00,445
Secondary issues
1,15,605
Compute the Intermediation Ratio for the economy.

0.71
b.
0.82
c.
0.85
d.
0.78
e.
0.91.
04
20
04
04
a.
M
AC
390. The following are the data pertaining to the various components of money supply.
o.
Rs. in Crores
Small coins
991
4-
4,986
31
Cash in hand
-4
1,942
27
Rupee coins
1,44,818
02
Notes in circulation
ef
.N
Currency with the public:
Other deposits with Reserve Bank
5,041
25,969
lr
ig
ht
re
se
rv
Post office deposits:

5,627
4,83,560
ed
Time deposits with banks
BN
99,106
.IS
Demand deposits with banks
:8
1-
Deposit money of the public:
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
Calculate measure of money stock (M1) as evolved by Reserve Bank of India.

a. 2,42,580
b. 2,57,470
c. 2,48,775
d. 2,52,275
e. 2,45,465.
20
04
Th
e
Ic
391. The following balances have been taken from the balance sheet of Central Bank of an
economy.
Credit to bank
Government deposits
Net worth
Others assets

1,500
600
30
15
750
150
21
105
The currency/deposit ratio has been ascertained as 0.30 and the Central Bank imposes a
reserve ratio of 5%. The amount of government money is negligible.
193
Macroeconomics
The money supply in the economy is:

a. 5,525.75
b. 5,650.10
c. 5,680.48
d. 5,475.36
e. 5,872.29.
Following are the indicators of financial development of an economy for the year 2002-03.
M
AC
04
20
04
04
Finance ratio
0.70
1.40
New issues ratio
0.80
0.75
The net capital formation is 5,00,000 million units of currency.
8,15,000
e.
8,35,000.
ef
.N
d.
7,00,000
-4
c.
27
7,75,000
02
b.
4-
7,25,000
31
a.
o.
392. The value of the Total Issue is:
e.
11,50,000.
:8
15,00,000
BN
d.
.IS
12,50,000
ed
c.
se
rv
12,00,000
re
10,00,000
b.
a.
1-
ig
ht
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
Particulars
Government Deposits
Foreign Exchange Assets
Net worth
Other assets
Credit to banks
Credit to commercial Sector
Deposits of Banks

50
20
1,000
50
25
1,750
750
500
125
The currency deposit ratio has been ascertained as 34%. The amount of Government money
is 5 million units of currency. Total money supply in the economy is 6,000 million units of
currency.
394. The Reserve Ratio imposed by the Central Bank would be:
194
a.
11.76
b.
12.28
c.
10.87
d.
10.67
e.
11.25.
Part-II
395. There is an increase in Central Bank credit to Government by 550 million units of currency.
But the Central Bank desires to contain the money supply at the original level and for this
purpose it alters the reserve ratio. The new reserve ratio is:
a.
21.5
b.
22.9
c.
20.5
d.
23.8
e.
21.7.
M
AC
04
0.25
1.60
0.85
0.88
ef
.N
National income during the period is 96,000 million units of currency.
-4
15,000.
27
e.
02
16,000
4-
d.
31
14,000
1-
c.
:8
12,000
e.
12,500.
se
rv
11,500
re
d.
12,750
ht
c.
ig
13,250
lr
b.
s.
Al
11,250
Pr
es
a.
ed
397. The value of the Secondary Issues is:
BN
b.
.IS
13,500
396. The value of the Net Capital formulation is:

a.
o.
Finance ratio
New issues ratio
20
04
Following are the indicators of financial development of an economy for the year 2002-03.
04
ve
rs
i
ty
9,600
iU
ni
Secondary Issues:
Issues of Financial Institutions
2001
20
04
Th
e
Ic
fa
Primary Issues:
Issues of Non-Financial Sectors
a. Domestic Sectors
11,600
b. Rest of the World
1,200
Net Capital Formation (Net Physical Assets)
1,600
National income
89,600
398. The value of Finance Ratio is:

a.
0.70
b.
0.65
c.
0.25
d.
0.42
e.
0.28.
195
Macroeconomics
399. Calculate Intermediation Ratio.

a. 0.85
b. 0.82
c. 0.71
d. 0.73
e. 0.75.
400.
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Secondary Issues:
12,000
Issues of Financial Institutions
Primary Issues:
Issues of Non-Financial Sectors
a. Domestic Sectors
13,400
b. Rest of the World
1,600
Net Capital Formation
20,000
(Net Physical Assets)
National income
1,00,000
The value of Finance Interrelations Ratio is:
a. 1.38
b. 1.35
c. 1.42
d. 1.48
e. 1.29.
401. The following balances have been taken from the balance sheet of the Central Bank of an
economy.
re
s
1,000
400
20
10
500
100
70
14
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
Credit to banks
Government deposits
Net worth
Other assets
se
rv
ed
Particulars
Ic
fa
iU
The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a
reserve ratio of 5%.
20
04
Th
e
The value of Money Supply in the economy is:

a. 5,018.5
b. 5,025.2
c. 5,109.8
d. 5,059.2
e. 5,138.5.
Particulars
Secondary issues
Primary issues
National income
196
2001-2002
68,500
47,445
1,16,450
6,50,750
Part-II
402. The value of Finance Ratio is:

a.
0.178
b.
0.125
c.
0.195
d.
0.182
e.
0.165.
d.
0.407
e.
0.412.
04
0.432
20
c.
04
0.425
b.
404. From the following financial data, calculate financial interrelations Ratio.
e.
0.915.
o.
ef
.N
R
-4
27
02
31
0.909
1-
d.
:8
0.992
BN
0.986
c.
.IS
b.
ed
0.998
se
rv
a.
2002-03
69,000
50,000
1,20,000
8,00,000
4-
Particulars
Secondary Issues
Primary Issues
Net Capital formation
National Income
0.417
M
AC
a.
04
403. The value of New Issues Ratio is:
re
ht
Following are the extracts from the balance sheet of Central Bank.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
Particulars
Credit to Banks
Government Deposits
Deposits of Banks
Other assets
Net worth

1,000
400
80
100
300
20
10
5
300
Government money in the economy is 10 million units of currency

The currency to deposit ratio is 35%
The reserve ratio is 10%
405. The value of the total money supply in the economy is:
a.
4,065
b.
4,078
c.
4,125
d.
4,150
e.
4,275.
197
Macroeconomics
406. An additional inflow of 50 million unit currency of foreign exchange assets is expected
during the coming year. However, the Central Bank wants to maintain the money supply at
the original level by altering the reserve ratio. The new reserve ratio is:
a. 10.98%
b. 11.66%
c. 11.75%
d. 12.85%
e. 12.76%.
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27

2,000
4,500
500
6,000
1,000
300
1,200
200
02
Particulars
Credit to banks
Net foreign exchange assets
Net worth
Government Deposits
Deposits of Banks
Other assets
04
Following are the extracts from the balance sheet of the Central Bank.
1-
31
4-
Government money in the economy is 100 MUC. Reserve ratio imposed by the Central Bank
is 10% and currency deposit ratio is 0.30.
d.
39,000
e.
41,000.
BN
.IS
ed
36,000
se
rv
c.
re
38,250
b.
ht
37,500
ig
a.
:8
407. The Money supply in the economy is:
Pr
es
s.
Al
lr
408. If there is a foreign exchange inflow of 450 million, then the required reserve ratio to sterilize
the effect of foreign exchange inflow is:
12.2
b.
11.5
c.
13.5
d.
10.7
e.
12.8.
Ic
fa
iU
ni
ve
rs
i
ty
a.
20
04
Th
e
409. The following are the excepts from the balance sheet of a Central Bank.
198
Particulars
Other deposits
Statutory and contingency reserves
Credit to Central Government
Shares & loans to financial institutions
Central bank claims on Commercial banks
Other assets
MUC
100
50
100
420
1,120
550
350
150
50
Part-II
If the government money is 25 MUC, the high powered money in the economy is:
a.
1,650 MUC
b.
1,750 MUC
c.
1,725 MUC
d.
1,825 MUC
e.
1,650 MUC.
410. In an economy the demand for money is estimated to be L = 0.25Y 10i. If the interest rate
is 6% and money supply is 200 MUC, the equilibrium level of output is:
1,060 MUC
b.
1,040 MUC
c.
1,080 MUC
d.
1,100 MUC
e.
1,120 MUC.
M
AC
04
20
04
04
a.
Fixed capital formation
225
Increase in inventories
50
ef
.N
-4
750
31
4-
02
Private final consumption expenditure
MUC
27
Particulars
o.
411. The following data pertains to a hypothetical economy.
160
1-
Government final consumption expenditure
BN
:8
Exports
.IS
Imports
30
239
se
rv
ed
Money supply
40
e.
7.
d.
ht
ig
c.
lr
s.
Al
b.
Pr
es
ty
a.
re
iU
ni
ve
rs
i
412. On the basis of following data calculate finance ratio for the year 2003.
Particulars
Ic
fa
GDP at market price
76,500
Depreciation
2,500
Indirect taxes
1,225
Th
e
20
04
MUC
Subsidies
725
200

Finance interrelation ratio
a.
28.6%
b.
31.6%
c.
34.6%
d.
26.6%
e.
36.6%.
15,500
1.5
199
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
413. The central banks monetary liabilities as on 31 December 2003 stood at 10,500 MUC and
Government money at 1,500 MUC. The currency deposit ratio is estimated to be 0.25. If the
Central bank intends to maintain the money supply at 48,000 MUC, what should be the
reserve ratio specified by the Central bank?
a. 6.25%.
b. 8.10%.
c. 9.10%.
d. 5.00%.
e. 4.25%.
414. In an economy demand for money is
Md = 500 + 0.2Y 20i
If money supply in the economy is 2,340 MUC and equilibrium rate of interest is 8 percent,
national income is
a. 340 MUC
b. 500 MUC
c. 1,000 MUC
d. 2,000 MUC
e. 10,000 MUC.
415. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and
total demand for money is Rs.5,000, then the amount required by banks to meet the reserve
requirement is equal to
a. Rs.250
b. Rs.2,250
c. Rs.2,500
d. Rs.5,000
416. As on December 20, 2003 monetary liabilities of the central bank are 1,200 MUC and
government money is 50 MUC. The currency deposit ratio is 0.2, while reserve ratio
specified by the central bank is 5%. During the coming year, an additional flow of 50 MUC
of foreign exchange assets is expected. If the central bank wants to maintain the money
supply at the original level by resorting to open market operations, what would be the worth
of government securities to be sold in the market?
a. Rs.50 MUC.
b. Rs.250 MUC.
c. Rs.175 MUC.
d. Rs.225 MUC.
e. Rs.210 MUC.
417. The following balances are taken from the balance sheet of the Central Bank:
Loans given to the Government
Reserves maintained by the banks
Net worth
Loans to the commercial banks
Government deposits
Other assets
Other deposits with the central bank
200
MUC
1,200
300
80
800
200
60
10
1,500
Part-II
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Loans to the commercial sector

20
If the government money is 100 MUC, high-powered money in the economy is
a. 3,000 MUC
b. 3,050 MUC
c. 3,100 MUC
d. 3,300 MUC
e. 3,400 MUC.
418. As on september 30, 2003 monetary liabilities of the central bank are 1,200 MUC and
government money is 50 MUC. If the currency deposit ratio is 0.20 and the central bank
specifies a reserve ratio of 5%, money supply in the economy will be
a. 5,000 MUC
b. 5,500 MUC
c. 6,000 MUC
d. 6,550 MUC
e. 6,600 MUC.
419. In an economy the high powered money is 500MUC. The currency deposit ratio is estimated
to be 0.40 and the reserve ratio is 10%. If foreign exchange assets with the central bank
increase by 10 MUC what is the new reserve ratio so that the money supply remains at the
previous level?
a. 9%.
b. 10%.
c. 11%.
d. 12%.
e. 13%.
420. Indicators of financial development of an economy for the year 2002-03 are given below:
0.50
0.32
re
Finance ratio
Financial inter-relation ratio
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
If the national income for the year 2002-03 is 19,200MUC, the total issues will be
a. 7,800 MUC
b. 8,200 MUC
c. 8,700 MUC
d. 9,000 MUC
e. 9,600 MUC.
421. In an economy, the high-powered money and money supply are 4,300 MUC and 17,200
MUC respectively. If the reserve ratio is 10%, currency deposit ratio for the economy is
a. 0.17
b. 0.20
c. 0.24
d. 0.27
e. 0.29.
a. Rs.250
b. Rs.2,250
c. Rs.2,500
d. Rs.5,000
201
Macroeconomics
e.
None of the above.
423.
Reserves with the Central Bank
Rs.8,000
Rs.32, 000
25%
d.
0.8.
e.
0.1.
04
0.2.
20
c.
04
0.4.
b.
0.5.
M
AC
a.
04
If the volume of reserves is decreased by Rs.1200 and volume of demand deposits increased
by Rs.2,000, what will be the new reserve ratio?
Finance Ratio:
Intermediation Ratio:
Financial Interrelations Ratio:
ef
.N
o.
424. The following indicators of financial development for an economy are available for the year
19x0.
02
27
-4
0.35
0.68
1.75
e.
17,320.
:8
15,750
BN
d.
.IS
16,750
ed
c.
se
rv
17,280
re
b.
15,450
ht
a.
1-
31
4-
Calculate Net Capital Formation for the year 19x0, if the New Issues for the year is 18,000
(Million units of currency).
s.
Al
lr
ig
425. The following are the figures from the balance sheet of Central Bank
Pr
es
Particulars
ve
rs
i
ty
ni
Credit to banks
fa
iU
Government deposits
20
04
Th
e
Ic
Million units
of currency
2,500
500
25
18
Net worth
522
160
Other assets
75
Foreign exchange assets.
15
The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a
reserve ratio of 5%. Calculate the money supply in the economy.
202
a.
12,660
b.
12,458
c.
12,980
d.
12,725
Part-II
e.
12,888.
426.
Particulars
Rs. in Crore
Share capital
740
Reserve funds
75
1,010
890
Deposits of Banks
235
Credit to banks
460
130
20
Government money
04
70
Government deposits
44
M
AC
76
Other assets
ef
.N
04
55
o.
04
Credit to state government
5,425
e.
5,550.
27
d.
02
5,320
4-
c.
31
5,645
1-
b.
:8
5,291
BN
a.
-4
In the economy currency deposit ratio is 0.3 and reserve ratio 0.10 is imposed by Central
Bank.
ht
re
se
rv
= 5000
= 18,000
= 25%
ig
Reserves with Central Bank

ed
.IS
427.
0.16.
c.
0.12.
d.
0.22.
e.
0.23.
Pr
es
b.
ty
0.18.
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
lr
If the volume of reserves is decreased by 750 and volume of demand deposits increased by
1,200 what will be the new reserve ratio?
20
04
Th
e
428. From the following calculate M3.

2,250
630
478
Time deposits with the bank
535
312
a.
3,415
b.
3,225
c.
3,260
d.
3,650
e.
3,420.
203
Macroeconomics
429.
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Rs. in crore
Net worth
820
Other assets
48
22
Government deposits
165
435
25
1,525
Credit to banks
675
The currency deposit ratio in the economy is 0.4 and reserve ratio is 6%, then how much
should be the Government money in the economy to have a money supply of 6,325?
a. 357.8.
b. 368.5.
c. 354.2.
d. 384.6.
e. 377.2.
430. In an economy, the currency with the public is Rs.6,500 crore and banks reserve are
Rs.2,200 crore. The currency deposit ratio is 0.5 and the Central Bank imposes a reserve ratio
of 0.12. Calculate the money supply in the economy.
a. 20,350
b. 20,570
c. 20,455
d. 20,635
e. 20,215.
431.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
The stock of High-powered money (H)

= 22,550
The currency deposit ratio (Cu)
= 0.6
The reserve ratio (r)
= 0.12
The Central bank purchases the government securities worth Rs.12,500.
Calculate the increase in money supply in the economy.
a. 27,550
b. 26,450
c. 26,840
d. 27,750
e. 15,870.
20
04
Th
e
432. Assume that the ability of the commercial banking system to create demand deposits depends
only upon reserve requirement stipulated by the Central Bank.
Reserve with the Central Bank
= 3,200
= 11,500
= 30%
If the volumes of reserves are decreased by 700 and reserve requirement is lowered to 25%,
find out the estimated demand deposit.
a. 10,000
b. 11,200
c. 12,150
d. 12,300
e. 12,600.
204
Part-II
433.
Particulars
1985
Finance ratio
0.26
0.78
Finance interrelation ratio
1.50
d.
0.935
e.
0.843.
04
0.922
20
c.
04
0.826
b.
0.985
M
AC
a.
24,000
04
New Issues (Million Units of currency)

Calculate the new issue ratio.
434. The following are the data pertaining to the various components of money supply.
ef
.N
o.
Rs. in crores
Cash in hand
4,986
27
BN
:8
Deposit money of the public:
02
991
4-
1,942
Small coins
31
Rupee coins
-4
1,44,818
1-
Currency with the public:
99,106
.IS
4,83,560
se
rv
5,627
ed
re
Post office deposits:
s.
Al
lr
ig
ht
5,041
25,969
b.
7,41,030
7,41,228
d.
7,41,145
fa
iU
ni
c.
Ic
7,41,160.
Th
e
e.
ty
7,41,540
ve
rs
i
a.
Pr
es
Calculate measure of money stock M3.
20
04
Following is the information relating to balance of payments of an economy for the year
2000-2001.
External assistance to the country
External assistance by the country
Transfers (debit)
Transfers (credit)
Merchandize exports
Merchandize imports
(US$ million)
36
82
170
248
34,954
36,984
205
Macroeconomics
Export of services
31,944
Import of services
24,928
Earnings of loans and investments to abroad
858
Earnings of loans and investments from abroad
2,108
Short-term loans and investments to abroad
576
Short-term loans and investments from abroad
84
Foreign direct investments to abroad
70
04
04
200
20
Foreign direct investments from abroad
2,018
e.
2,125.
d.
2,257
M
AC
c.
o.
2,125
ef
.N
b.
2,030
-4
a.
04
435. The value of the Trade Balance is:
5,645.
02
e.
4-
5,906
31
d.
1-
5,725
:8
c.
BN
5,546
.IS
b.
ed
5,865
se
rv
a.
27
436. The overall Balance of Payments is:
ht
Particulars
re
437.
Agricultural Exports
b.
Aircraft Exports
c.
Automobile Imports
d.
Overseas earnings by insurance companies
100
e.
Dividends paid to foreign investors
275
f.
Donations received from abroad
450
1,050
Direct investment abroad
900
h.
Short-term loans and investment abroad
100
i.
Foreign Direct Investments
850
Ic
fa
122
Th
e
20
04
1,000
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
g.
The value of current account Balance is:
206
Rs. in Crores
a.
+350
b.
345
c.
+347
d.
341
e.
+352.
Part-II
04
20
04
B
W
M
AC
o.
ef
.N
-4
27
02
Merchandize Imports
Merchandize Exports
Travel (net)
Transportation (net)
Earnings on Loans and Investments Abroad
Transfers (debit)
Transfers (credit)
External Assistance to India (net)
External Assistance by India
Direct Investments abroad (net)
Foreign Direct Investments in the country
Portfolio Investment in India (net)
Short-term Loans and Investments to India
Commercial Borrowings (long-term) by India
Commercial Borrowings (long-term) to India (net)
Deposits made by NRIs (net)
Net assets of Commercial banks
Net liabilities of Commercial banks
Miscellaneous Banking Capital (net)
Rupee Debt service
Other Capital (net)
ed
Pr
es
s.
Al
lr
ig
ht
re
se
rv
The value of total capital account is:

a. 10,242
b. 10,348
c. 10375
d. 10,265
e. 10,328.
.IS
BN
:8
1-
31
4-
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
(US $ million)
55,383
38,285
11,865
15,721
1,931
34
12,290
901
10
74
2,167
3,024
377
20
+313
2,140
790
26
177
711
1,508
04
438. The following information is extracted from Indias balance of payments statement, 2002-2003.
You are required to prepare the capital account.
The Open Economy and Balance of Payments
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
439. The capital inflows and outflows in an economy during the year 2002-03 are 6,300 MUC and
4,500 MUC respectively. Suppose there is no change in the official foreign reserve assets
held by the central bank, what could be the current account balance for the economy?
a. 1,500 MUC (Deficit).
b. 1,800 MUC (Surplus).
c. 1,800 MUC (Deficit).
d. 1,500 MUC (Surplus).
e. Zero.
Indias overall Balance of Payments for the year 2002 03
Items
Merchandise
Services
Transfers
Income
Foreign Direct Investment
(US $ million)
Credit
Debit
53000
65474
24986
18780
15225
367
2826
7708
4790
1179
207
Macroeconomics
04
04
20
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
440. During the year 2002-03, trade deficit for India is

a. $ 12,474 million
b. $ 12,574 million
c. $ 12,974 million
d. $ 13,821 million
e. $ 13,980 million.
441. During the year 2002-03, current account balance for India is
a. $ 3,708 million (surplus)
b. $3,708 million (deficit)
c. $3,998 million (deficit)
d. $3,798 million (surplus)
e. $3,888 million (deficit).
442. During the year 2002-03, net foreign investment in India is
a. $ 4,755 million
b. $ 4,595 million
c. $ 4,625 million
d. $ 4,555 million
e. $ 4,825 million.
443. During the year 2002-03, over all Balance of Payments position for India is
a. $18,280 million (surplus)
b. $16,980 million (deficit)
c. $17,280 million (deficit)
d. $17,580 million (surplus)
e. $ 16,980 million (surplus).
04
Portfolio Investment
External Assistance
Commercial Borrowings (MT & LT)
Commercial Borrowings (Short Term)
Commercial Banks
Others
Rupee Debt Service
Other Capital
Errors & Omissions
Debit
6591
5233
4435
7210
8973
246
474
2909
Credit
7535
2773
2737
8189
16926
536
6402
634
Items
iU
ni

Debt
20
04
Th
e
Ic
fa
444. The following information is extracted from the Union Budget for the year 2003-04:
208
Particulars
Tax Revenue (net to center)

Non-tax Revenue
Recoveries of Loans
Other Receipts
Borrowings and other Liabilities
Non-plan expenditure:
On revenue account (excluding interest payment)
On capital account
Plan Expenditure:
On Revenue Account
On Capital Account
Primary Deficit:
2003-2004 Budget Estimates

(in Rs. crore)
1,84,169
69,766
18,023
13,200
1,53,637
1,66,161
28,437
76,843
44,131
30,414
Part-II
The Revenue Deficit for the year 2003-04 is

a. Rs.2,53,935 cr
b. Rs.1,12,292 cr
c. Rs.1,53,637 cr
d. Rs.4,38,795 cr
e. Rs.1,02,932 cr
Budget Estimate for the year 2003-04
04
20
o.
M
AC
04
1,84,169
69,766
18,023
13,200
1,53,637
2,89,384
28,437
-4
ef
.N
Tax Revenue (net to Centre)

Non-tax revenue
Recoveries of Loans
Other Receipts
Non-plan Expenditure
On Revenue Account (of which Interest Payments is Rs.1,23,223 cr.)
On Capital Account
Plan Expenditure
On Revenue Account
On Capital Account
04
Rs. crore
d.
Rs.1,19,292 cr
31
Rs.1,12,292 cr
:8
c.
BN
Rs.1,12,392 cr
.IS
b.
ed
Rs.1,13,292 cr
se
rv
a.
1-
445. The estimated revenue deficit for the year 2003-04 is
4-
02
27
76,843
44,131
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
e. Rs.1,19,922 cr.
446. The estimated primary deficit for the year 2003-04 is
a. Rs.31,814 cr
b. Rs.30,814 cr
c. Rs.31,414 cr
d. Rs.30,414 cr
e. Rs.32,414 cr.
ni
20
04
Th
e
Ic
fa
iU
The following estimates are extracted from the Union Budget for the year 2002-03.
Tax Revenue
Non-tax revenue
Recoveries of Loans
Other Capital Receipts
Borrowings/other Liabilities
Non-plan Expenditure:
On Revenue Account (of which interest payment is Rs.75,000 Crore)
On Capital Account
Plan Expenditure:
On Revenue Account
On Capital Account
Rs. in Crore
1,16,857
45,137
9,908
5,000
91,025
1,66,301
29,624
43,761
28,241
209
Macroeconomics
447. The value of the Revenue Receipts is:

a.
1,61,984
b.
1,65,948
c.
1,62,895
d.
1,62,750
1,05,947
d.
1,05,942
e.
1,05,928.
04
c.
20
1,05,933
04
b.
1,05,995
a.
04
e. 1,61,994.
448. The value of Capital Receipts is:
02
27
-4
ef
.N
o.
M
AC
450. The value of the Fiscal Deficit is:

a. 91,056
b. 91,045
c. 91,025
d. 91,080
e. 91,074.
4-
.IS
ed
se
rv
Rs. in Crore
1,46,209
57,464
13,539
10,000
1,11,275
2,28,768
1,01,266
21,619
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Tax Revenue (Net)

Non-tax Revenue
Recoveries of Loans
Other Receipts
Borrowings and Other Liabilities
Non-plan Expenditure:
On Revenue Account of which
Interest Payments
On Capital Account
Plan Expenditure:
On Revenue Account
On Capital Account
BN
:8
1-
31
The following items are taken from the Union Budget for the year 2000-01.
20
04
Th
e
a.
Ic
fa
450. The Primary Fiscal Deficit is:

10,280
b.
10,265
c.
10,009
d.
10,555
e.
10,256.
451. The value of Revenue Deficit is:
210
a.
77,425
b.
77,275
c.
76,780
d.
76,220
e.
78,650.
52,330
35,770
Part-II
(Rs. in Crore)
Direct Taxes
40,000
10,000
Interest Receipts
12,000
22,000
Profit from Public Sector Undertakings
17,000
Profit from Railways
13,000
30,000
ef
.N
R
-4
27
02
431
1:8
BN
ig
ht
re
se
rv
ed
.IS
452. The value of the Revenue Receipts is:

a. 2,05,000
b. 2,03,000
c. 2,03,050
d. 2,02,500
e. 2,02,000.
453. The value of the Non-plan Expenditure is:
a. 2,08,500
b. 2,09,000
c. 2,09,250
d. 2,08,750
e. 2,08,400.
Defense Expenditure
47,000
o.
Interest Payments
04
1,32,000
M
AC
Subsidies
04
Recovery of Loans
04
1,20,000
20
Indirect Taxes
Tax Revenue
Pr
es
s.
Al
lr
454. The value of Deficit Fiscal from the following data extracted from Union Budget, 1999-2000.
1,32,365
50,475
2,36,987
46,895
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Non-tax Revenue
Total Revenue Expenditure
Total Capital Expenditure
Non-plan Revenue Expenditure
(excl. interest Payments)
Interest Payments
Loans Recovered
Other Capital Receipts
(Rs. in crore)
a.
78,985
b.
77,998
c.
79,595
d.
79,955
e.
79,050.
1,02,331
88,000
11,087
10,000
211
Macroeconomics
The following information is extracted from the union budget for the year 2002-03.
(Rs. in crore)
1,22,475.
04
04
20
04
ed
se
rv
re
79,280.
e.
ht
78,750
ig
d.
lr
77,275
s.
Al
77,425
c.
.IS
78,435
b.
BN
456. The value of Revenue deficit is:

a.
M
AC
e.
-4
1,11,275
27
d.
02
1,21,275
4-
c.
31
1,25,750
1-
b.
:8
1,12,575
2,28,768
21,619
52,330
35,770
ef
.N
455. The value of Fiscal Deficit is:

a.
1,46,209
57,464
13,539
1,12,275
10,000
o.
Tax Revenues
Non-tax Revenues
Recoveries of Loans
Other Receipts
(Of which disinvestment proceeds committed for redemption of Public
debt 1,000 cr.)
Non-plan Revenue Expenditure (incl. Interest payments of Rs.101266 cr.)
Non-plan Capital Expenditure
Planned Revenue Expenditure
Planned Capital Expenditure
Pr
es
2.0%.
b.
3.0%.
fa
iU
ni
a.
Ic
4.0% .
d.
3.5% .
e.
4.5%.
20
04
Th
e
c.
ve
rs
i
ty
457. For an economy, the growth rate of population is likely to be 2% per annum. Given that capital
output ratio is 5 and possible level of investment is 25 percent of GDP, what is the possible per
capita real GDP growth rate?
458. The Planning Commission is targeting a growth rate of 6% p.a. in per capita income for the
next 10 years. To achieve the target, the required domestic savings to income ratio is 32%. If
the population is expected to grow at the rate of 2% p.a., capital output ratio for the economy
is
212
a.
3.0
b.
4.5
c.
5.0
d.
4.0
e.
5.5.
Part-II
Targeted growth rate in real GDP =
7.0%
Incremental capital output ratio
Gross domestic savings as a proportion of the GDP for the year is expected to be 24%.
4%
b.
6%
c.
3.5%
d.
4.25%
e.
5%.
20
04
a.
04
459. The required external financing to achieve the targeted growth rate in GDP is:
4.9%
d.
4.8%
e.
5%.
c.
M
AC
4.3%
o.
b.
ef
.N
4.5%
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
a.
04
460. The per capita GDP, if population is expected to increase by 2% during the same period is:
213
Part II: Solutions

1. (b)
24.0
37.8
53.2
19.5
134.5
04
0.20
0.27
0.40
0.13
04
120
140
133
150
20
9.00
7.00
20.00
0.75
(i) x (ii)
ef
.N
o.
M
AC
Weight
(ii)
-4
120
130
130
100
100
27
10
8
6
20
400
02
20
10
40
15
Single
Bedroom
Price relative
1996-97
(i)
4-
Rice
Wheat
Milk
Cotton Cloth
Housing
Price
1996-97
Rs.
12.00
8.00
7.80
20.00
400
31
Price
1991-92
Rs.
1-
Qty
1991-92
0.164
0.066
0.197
0.246
0.328
19.68
6.60
25.61
24.60
32.80
Retail price index
109.30
.IS
BN
:8
Item
Pulse
10 Kg
7.50
Rice
20 Kg
5.00
Cotton cloth
10/Mtr
15.0
Electricity
100 Unit
0.50
Laspeyers consumer price Index
2. (e)
Weights
(iii)
(ii)
= (i) x (iii)
Price relative
1995 96 (i)
04
Qty (Qio) Price (Pio) Price (Pit)

1985 86 1985 86 1995 96
Item
ed
3. (d) Real GNPCurrent Period
se
rv
= Nominal GNPCurrent Period GNP Deflator base period /GNP Deflator Current Period
re
Real GNP of 2001-02
ig
ht
= Nominal GNP 2001-02 (GNP Deflator 2000-01/ GNP Deflator 2001-02)
s.
Al
lr
= 2500 (100/120) = 2,083.33.
Pr
es
4. (a) Real GNP of 2002-03
= Nominal GNP 2002-03 (GNP Deflator 2000-01/GNP Deflator 2001-02).
ve
rs
i
ty
= 3,200 (100/145) = 2,207.00.p

= (Real GNP 1996-97/Real GNP 1995-96) 1
= (2,207/2,083) 1 = 0.059 = 5.9%.
(c) Inflation Rate
= [(GNP Deflator Current Period GNP Deflator Base Period) GNP Deflator Base Period] 100
= [(145 120)/120] 100 = 20.83%.
(d) Real GNP2002 03 = Nominal GNP 2002 03 (GNP Deflator 1995-96/GNP Deflator 2002 03)
= 3,200 (100/159.5) = 2,006.
(a) The real GNP for the period 2001-02 is (2,500/100) 100 = 2,500.
(e) Inflation rate in relaxation to 2001-02.
= (159.5 100)/100 = 59.5%.
(c) GDP at Factor Cost = Wages of salaries (w) + Interest (I) + Gross profits (P) + Rent (R).
= 85 + 15 + 10 + 5 + 10 = 125.
(e) GDP at Factor Cost
= GNP at FC Net Factor Income from Abroad.
GNP at FC
= GNP at MP Indirect Taxes + Subsidies.
Ic
Th
e
6.
fa
iU
ni
5. (b) Growth Rate
20
04
7.
8.
9.
10.
11.
214
Part II
= 5,000 450 + 400 = 4,950

GDP at Factor Cost = 4,950 (900 800) = 4,850.
12. (d) National Income = NNP at Factor Cost.
NNP at FC
= GNP at FC Depreciation
GNP at FC
= GNP at MP Indirect Taxes + Subsidies

= 5,000 450 + 400 = 4,950
National Income = 4,950 350 = 4,600.
13. (c) Personal Disposable Income
04
M
AC
Personal Income = 4,600 200 800 = 3,600

Personal Disposable Income = 3,600 1,000 = 2,600.
14. (b) Net Factor Income from Abroad
o.
(i)
ef
.N
= GNP at MP GDP at MP
20
National Income Retained Earnings Corporate Tax
04
Personal Income =
04
= Personal Income Personal Income Tax.
GNP at MP = GDP at MP + Net Factor Income from Abroad
27
-4
where, GDP at MP
02
= GDP at FC + Indirect Taxes Subsidies.
:8
1-
31
4-
= 80,000 + 5,000 0 = 85,000

Net Factor Income from Abroad
BN
= 95,000 85,000 = 10,000.
.IS
15. (a) GDP at FC
se
rv
ed
= Wages and Salaries + Dividends + Retained Profits + Profit tax.
re
= 200 + 40 + 50 + 10 = 300.
ht
16. (e) GDP at Factor Cost
lr
ig
= Wages + Dividends + Retained Profits + Profit Tax
s.
Al
= 250 +40 + 30 +40 +30 = 390.
Pr
es
17. (a) GNP at FC = GDP at FC + Net Income from Abroad
ve
rs
i
ty
Net Income from Abroad

= Factor Income Received from Abroad Factor Income Paid Abroad.
iU
ni
= 60 30 = 30.
Ic
fa
GNP at FC = 390 + 30 = 420.
20
04
Th
e
18. (c) GNP at MP = GNP at FC + Indirect Taxes Subsidies.

GNP at FC
= GDP at FC + Net Income from Abroad
Net Income from Abroad

= Factor Income Received from Abroad Factor Income paid Abroad.
= 60 30
= 30.
GNP at FC = 390 + 30 = 420.

GNP at MP = 420 + 10 0 = 430.
19. (a) NDP at FC = GDP at factor cost Depreciation
=
Factor Income paid to Residents and Non-residents + Retained Profits + Corporate

Profit Tax Depreciation
185 + 25 + 20 + 5 40 = 195.
215
Macroeconomics
20. (d) GDP at Market Price

GDP at FC
= Wages and Salaries + Dividends + Retained Profit + Profit Tax
= 300 + 80 + 50 + 30 = 460
GDP at MP = 460 + 20 0 = 480.
4-
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
20
04
ty
ve
rs
i
ni
Th
e
28.
Ic
fa
27.
iU
26.
29.
30.
= (5,775 735) + 780 + 150 = 5,970

Personal Disposable Income = 5,970 900 = 5,070.
216
04
20
04
B
W
M
AC
= 1,35,000 (100/121.01) = 1,11,561.

(c) Net Indirect Taxes
= NNP at Market Prices National Income (or)
Indirect Taxes Subsidies
= (GNP at MP Depreciation) National Income.
= GNP at MP (Gross Investment Net Investment) National Income.
Where,
Gross Investment Net Investment = Depreciation.
= 4,800 (800 300) 3,850 = 450.
(e) Taxes Transfers = Govt. Purchases + Budget Surplus
= 930 + 30 = 960.
(e) Personal Income = Wages + Proprietors Income + Net Interest + Dividends + Transfer Payment.
= 2,920 + 320 + 120 + 100 + 510 = 3,970.
(b) Net Exports = GNP (C + I + G)
= 4,800 (3,000 + 800 + 930) = 4,800 4,730 = 70.
(b) Corporate Profits = National Income (Wages + Proprietors Income + Net Interest)
= 5,775 (4,380 + 480 + 180) = 735.
(a) NNP
= GNP Depreciation
Depreciation = Gross investment Net investment
= 1,200 450 = 750
NNP
= 7,200 750 = 6,450.
(c) Personal Disposable Income
= Personal Income Personal Taxes.
Personal Income
= (National Income Corporate Profits) + Transfer Payments + Dividends.
Pr
es
25.
o.
02
27
-4
= 55,000 (100/67.50) = 81,481.

23. (b) Real GNP for the year 2003
24.
ef
.N
R
= Nominal GNP 2001 (100/price level 2001)
04
21. (a) GNP at Market price

= GDP at MP + Net Factor Income from Abroad and GDP at MP
GDP at FC
= Wages and Salaries + Dividends + Retained Profit + Profit Tax
= 300 + 80 + 50 + 30 = 460
GDP at MP = 460 + 20 0 = 480
GNP at MP = 480 + (60 32) = 480 + 28 = 508.
22. (a) Real GNP for 2001
Part II
31. (c) Personal Savings
= Personal Disposable Income Consumption
Personal Disposable Income = Personal Income Personal taxes

Personal Income
= (National Income Corporate Profits) + Transfer Payments + Dividends.

= (5,775 735) + 780 + 150 = 5,970
Personal Disposable Income = 5,970 900
= 5,070
Personal Savings
= 5,070 4,500
32. (c) NNP at Factor Cost = National Income.
= 570.
NNP at Factor Cost
04
04
= GDP at MP + Net Factor Income from Abroad Depreciation + Subsidies Indirect Taxes.
GDP at Market Price
= 16,000 + 8,800 2,000 = 22,800.
ef
.N
o.
M
AC
33. (c) NDP at Factor Cost = NDP at Market Price Indirect taxes+ Subsidies
= 16,939 2,136 + 354 = 15,157.
04
= GDP at MP 1,000 4,000 + 2,000 3,800
16,000
20
Net Factor Income from Abroad = 3,000 4,000 = 1,000
34. (a) National Income
-4
= NNP at Factor Cost.
02
27
= NDP at Factor Cost + Net Income from Abroad
31
4-
= 15,157 46 = 15,111.
1-
35. (d) GNP at Factor Cost
BN
:8
= NNP at Factor Cost + Depreciation = 15,111 + 900 = 16,011.
.IS
36. (e) Target Per Capita real GDP growth = 5% p.a.
= 2.1% p.a.
ed
Expected Population Growth
se
rv
Growth required in GDP to achieve target per capita GDP growth = 5 + 2.1 = 7.1% p.a.
re
Capital Output ratio = 4:1
lr
ig
ht
We know that:
s.
Al
The required rate of investment as a percentage of GDP
Pr
es
= (Required GDP growth rate) (Capital Output ratio)
ty
Rate of Investment Required = 4 7.1 = 28.4%.
ve
rs
i
37. (a) GNP at Market Prices
iU
ni
= GDP at Market Price + Factor Income Received from Abroad Factor Income Paid Abroad
fa
= 6,000 + 1,500 1,200 = 6,300.
20
04
Th
e
Ic
38. (d) National Income = NNP at Factor Cost

= GNP at Market Prices + Subsidies Indirect Taxes Depreciation.
= 6,300 + 475 900 600 = 5,275.
39. (c) Personal Disposable Income

= National Income Retained Earnings Corporate Taxes Personal Taxes.
= 5,275 225 1,200 900 = 2,950
National Income = NNP at Factor Cost
= GNP at Market Prices + Subsidies Indirect Taxes Depreciation.
= 6,300 + 475 900 600 = 5,275.
40. (b) NNP = GNP Depreciation (i.e. Gross Investment Net Investment)
= 4,850 544 = 4,306.
217
Macroeconomics
41. (d) Net exports = GNP Domestic Absorption (i.e., C + I + G )

= 4,850 4,917 = 67.
42. (e) Calculation of GNP under Income Method
Rs.
Indirect Business Taxes
1,250.00
Compensation to Employees
8,487.50
Rents
1,000.00
Interest
500.00
250.00
Total (GNP)
04
20
750.00
04
Dividends
500.00
Corporate Taxes
04
1,250.00
M
AC
Proprietors Income
13,987.50
= 6.0%
Target per capita real GDP Growth
o.
= 1.9%
ef
.N
43. (e) Expected Population Growth
= 4 7.9 = 31.6%.
4-
02
Hence Rate of Investment
27
-4
Hence growth required in GDP to achieve target per capita GDP Growth = 1.9 + 6 = 7.9%
31
44. (b)
:8
1-
Production Account
Particulars Amount
(Rs.)
BN
.IS
7,500 Sales to House Holds
525
se
rv
ed
Wages
Amount
(Rs.)
Particulars
900 Investment in Stock Net

(Increase)
525
re
Profits
8,400
s.
Al
lr
ig
ht
8,400
45. (c) Input Output Account
Rose Corp.
Rs.
Rose Corp.
---Perfume Corp
---Bottle Corp.
---House Hold*
2,550
* Including Profits.
Perfume
Corp. Rs.
1,950
------4,950
Bottle Inventory
Corp. Rs.
Rs.
---7,200
---900
600
(300)
225
----
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
From/To
Value added GDP = 2,250 + 4,950 + 900 = 8,400.
46. (e) NNP at Market Price

= NDP at Market Price Net Factor Income from Abroad
= 84,686 233 = 84,453.
47. (c) GNP at Market Price
= NNP at Market Price + Depreciation = 84,453 + 4,957 = 89,410.
48. (a) NDP at Factor Cost
= NDP at Market Price Indirect Taxes + Subsidies.
= 84,686 10,689 + 1,772 = 75,769.
218
House
holds
------7,875
----
04
20
04
B
W
27
-4
ef
.N
o.
M
AC
49. (c) Depreciation

= GNP at Market Price NNP at Market Price
= Rs.1,07,226 1,00,575 = Rs.6,651.
50. (e) Net Factor Income from Abroad
= NNP at Market Price NDP at Market Price.
Rs.(1,00,575 1,00,422) = Rs.153.
51. (a) Subsidies
= GNP at Factor Cost + Indirect Taxes GNP at Market Prices.
= 95,023 + 14,723 1, 07,226 = 2,520.
52. (c) NDP at Factor Cost
= NDP at Market Price Indirect Taxes + Subsidies.
= 1,00,422 14,723 + 2,520 = 88,219.
53. (b) GNP at Market Prices
= GNP at Factor Cost + Indirect Taxes Subsidies.
= 1,14,601 + 16,745 2,822 = 1,28,524.
54. (a) NNP at Market Price
= GNP at Market Price Depreciation
also, GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies.
04
Part II
4-
02
= 1,14,601 + 16,745 2,822 = 1,28,524

= 1,28,524 8,062 = 1,20,462.
1-
31
NNP at Market Price
ed
.IS
BN
:8
55. (e) NDP at Market Price

= NNP at Market Price Net Factor Income from Abroad
also, NNP at Market Price = GNP at Market Price Depreciation
Pr
es
s.
Al
lr
ig
ht
re
se
rv
GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies.

= 1,14,601 + 16,745 2,822 = 1,28,524
NNP at Market Price = 1,28,524 8,062 = 1,20,462
NDP at Market Price = NNP at Market Price Net Factor Income from Abroad.
NDP at Market Price = 1,20,462 330 = 1,20,132.
56. (c) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies
ty
NNP at Market Price
iU
ni
ve
rs
i
GNP at Market Prices
= GNP at Factor Cost + Indirect Taxes Subsidies.

= 1,14,601 + 16,745 2,822 = 1,28,524
= 1,28,524 8,062 = 1,20,462
NDP at Market Price
= NNP at Market Price Net Factor Income from Abroad
Th
e
Ic
fa
NNP at Market Price

NDP at Market Price
= 1,20,462 330 = 1,20,132.
NDP at Factor Cost
= NDP at Market Price Indirect Taxes + Subsidies

= 1,20,132 16,745 + 2,822 = 1,06,209.
20
04
= GNP at Market Price Depreciation
57. (d) Personal Income = National Income Retained Earnings Corporate Taxes.
National Income
= NNP at Factor Cost
NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies.

NNP at Market Price = GNP at Market Price Depreciation
GNP at Market Prices = GNP at Factor Cost + Indirect Taxes Subsidies.
= 1,14,601 + 16,745 2,822 = 1,28,524
219
Macroeconomics
NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies

NNP at Factor Cost = 1,20,462 16,745 + 2,822 = 1,06,539
Personal Income
NNP at Factor Cost Retained Earnings Corporate Taxes
= 1,06,539 30,000 6,539 = 70,000.
20
04
fa
Th
e
Ic
62.
iU
ni
61.
ve
rs
i
ty
60.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
59.
ef
.N
o.
M
AC
04
04
20

= 1,14,601 + 16,745 2,822 = 1,28,524
NNP at Factor Cost = 1,20,462 16,745 + 2,822
National Income
= 1,06,539.
(c) Personal Disposable Income = Personal Income Personal Tax
Personal Income
= National Income Retained earnings Corporate Taxes
National Income
= NNP at Factor cost
NNP at Factor Cost = NNP at market price Indirect taxes + Subsidies.
NNP at Market Price = GNP at Market price Depreciation
= 1,14,601 + 16,745 2,822 = 1,28,524
National Income
= 1,06,539
Personal Income
= 1,06,539 30,000 6,539 = 70,000
Personal Disposable Income = Personal Income Personal Tax
= 70,000 10,000 = 60,000.
(e) Personal Income Tax = Personal Income Personal Disposable Income.
= 60,000 55,000 = 5,000.
(b) Retained Profits = National Income Personal Income
= 80,000 60,000 = 20,000.
(a) Personal Disposable Income = Personal Income Personal Taxes
Personal Income
= National Income Retained Earnings Corporate Tax
National Income
NNP at Factor Cost = GNP at Factor Cost Depreciation
GNP at Factor Cost = GNP at Market Price Indirect Taxes + Subsidies
= 4,000 600 + 350 = 3,750
NNP at Factor Cost = 3,750 400= 3,350
Personal Income
= 3,350 150 800 = 2,400
(d) GDP at Factor Cost
= GNP at Factor Cost Net Factor Income from Abroad
GNP at Factor Cost
= GNP at Market Price Indirect Taxes + Subsidies
= 4,000 600 + 350 = 3,750
GDP at Factor Cost
= 3,750 (1,000 800) = 3,550.
04
58. (a) National Income = NNP at Factor Cost
63.
220
Part II
64. (b) National Income = NNP at Factor Cost.

NNP at Factor Cost = GNP at Factor Cost Depreciation
GNP at Factor Cost = GDP at Factor Cost + Net Factor Income from Abroad
GDP at Factor Cost = GDP at Market Price Indirect Taxes + Subsidies
= 4,000 600 + 350 = 3,750
GNP at Factor Cost = 3,750 + (1,000 800) = 3,950
NNP at Factor Cost = 3,950 400 = 3,550
National Income
= 3,550.
GDP at Factor Cost + Net Factor Income from Abroad
04
Also GDP at Factor Cost = GDP at Market price Indirect Taxes + Subsidies
04
20
GNP at Factor Cost
04
65. (d) GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies
= 3,950 + 600 350 = 4200.
M
AC
= 3,750 + (1,000 800) = 3,950
GNP at Market Price

66. (a)
27
Quantities
30
20
1
5
100
Price(Rs.)
3/kg
4/ltr
5/doz
15/mtr
0.3/unit
pi0 qi0
pit qi0
90
80
5
75
30
280
150
120
6.5
125
40
441.5
5
p t q0
i=1 i i
4-
02
( )
31
Price (Rs.)
5/kg
6/ltr
6.5/doz
25/mtr
0.4/unit
5
p0q0
i =1 i i
1-
:8
BN
.IS
Kg.
Ltr.
Doz
Meters
units
( )
s.
Al
lr
ig
ht
re
Rice
Milk
Eggs
Cloth
Electricity
( )
ed
Unit
se
rv
Item
-4
Base year: 1980-81 Current year 1995-96

Base Year
Current year
Base Year
0
0
qi
pi
pit
ef
.N
o.
GNP at Factor Cost
= 4,000 600 + 350 = 3,750
Pr
es
If the index is computed by using the formula:
ty
ni
ve
rs
i
P0t =
pit qi0
i =1
n
100
pi0 qi0
fa
iU
i =1
Th
e
Ic
Where the weights are calculated using current year quantities

= 441.5/280 100 = 157.68.
20
04
67. (e) GNP at Market Price

GNP at Factor cost
= GNP at Factor Cost + Indirect Taxes Subsidies

= GDP at Factor Cost + Net Factor Income from Abroad
= 6,000 + (1,500 1,800) = 6,000 300 = 5,700.

GNP at Market Price
= 5,700 + 800 400 = 6,100.
68. (a) National Income = NNP at Factor Cost

NNP at Factor Cost
= NNP at market price Indirect taxes + Subsidies

GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies
GNP at Factor Cost

= 6,000 + (1,500 1,800) = 6,000 300 = 5,700.
221
Macroeconomics
GNP at Market Price = 5,700 + 800 400 = 6,100

NNP at Market Price = 6,100 400 = 5,700
NNP at Factor Cost
= 5,700 800 + 400 = 5,300
National Income
= 5,300.
69. (c) Personal Disposable Income = Personal Income Personal tax

Personal Income
= National Income Retained Earnings Corporate Taxes
National Income
04
04
NNP at market price = GNP at Market Price Depreciation
= 5,700
NNP at Factor Cost = 5,700 800 + 400
= 5,300
ef
.N
R
-4
= 5,300 250 1,200
27
Personal Income
M
AC
NNP at Market Price = 6,100 400
o.
= 6,100.
431
02
= 5,300 1,450 = 3,850
:8
1-
= GDP at Market Prices + Net Factor Income from Abroad

Depreciation + Subsidies Indirect Taxes
BN
70. (a) NNP at Factor Cost
= 6,000 + (1,500 1,800) = 6,000 300 = 5,700.

GNP at Market Price = 5,700 + 800 400
04
GNP at Factor cost
20
GNP at market price = GNP at Factor Cost + Indirect Taxes Subsidies
.IS
= GDP at Market Prices 500 2,000 + 1,000 1,900
se
rv
ed
= GDP at Market Prices 3,400
re
i.e. GDP at Market Prices NNP at Factor Cost = 3,400
ht
The difference between GDP at Market Price and NNP at Factor Cost = 3,400.
lr
ig
71. (d) Real GNP for the year 1990:
s.
Al
= 23,200 (100/49.70) 46,680 Crore
Pr
es
Real GNP for the year 2003
ve
rs
i
ty
= 1,30,000 (100/105.90) 1,22,757 Crore
ni
The real GNP for the years 1990 and 2003 are 46,680 and 1,22,757 Crore.
fa
iU
72. (e) GNP at Market Prices
20
04
Th
e
Ic
= 71,000 + 2,000
= NNP at Market Price + Depreciation

= 73,000.
GNP at Market Price
= GDP at Market Price + Net Factor Income from Abroad.
GDP at Market Prices
= GDP at Factor Cost + Indirect Taxes Subsidies

= 70,000 + 1,000 0 = 71,000.
Net Factor Income from Abroad = GNP at Market Prices GDP at Market Prices
= 73,000 71,000 = 2,000.
73. (b) NNP = GNP Depreciation = 2,400 250 = 2,150
where : Depreciation = Gross Investment Net Investment
= 400 150 = 250.
74. (d) Net Exports = GNP (C + I + G)
= 2,400 (1,500 + 400 + 480) = 2,400 1,380 = 20.
222
Part II
75. (c) Net Indirect Taxes = NNP National Income.

NNP = GNP Depreciation
= 2,400 250 = 2,150
Depreciation
= Gross investment Net investment = 400 150 = 250
Net Indirect Taxes
= 2,150 1,925 = 225.
76. (a) Corporate Profits

= National Income (Wages and Salaries + Proprietors Income + Rental Income + Net Interest)
= 1,925 (1,460 + 160 + 60) = 1,925 1,680 = 245.
04
= Gross Purchases + Budget Surplus
04
77. (e) Taxes Transfers
20
= 480 + 15 = 495.
04
78. (c) Personal Income = National Income Corporate Profits + Transfer Payments + Dividends
M
AC
= (1,925 245) + 260 + 50 = 1,990
= National Income (Wages and Salaries + Proprietors Income +

Rental Income + Net Interest)
o.
Corporate Profits
ef
.N
= 1,925 (1,460 + 160 + 60) = 1,925 1,680 = 245.
= Personal Income Personal Taxes and Non-Tax Payments.
= National Income Corporate Profits + Transfer Payments + Dividends.
02
31
4-
= (1,925 245) + 260 + 50 = 1,990
27
-4
Personal Income
79. (b) Personal Disposable Income
:8
1-
80. (a) Personal Saving = Personal Disposable Income Consumption.
se
rv
ed
.IS
BN
Personal Disposable Income = Personal Income Personal taxes and Non-tax Payments.
Personal Income
= National Income Corporate Profits + Transfer
Payments + Dividends.
ni
ve
rs
i
ty
Pr
es
s.
Al
81. (e) Since National Income is the

ignored.
Final sales of A
=
Final sales of B
=
Final sales of C
=
iU
1,990 300 = 1,690
1,690 1,500 = 190.
lr
ig
ht
Personal Savings
(1,925 245) + 260 + 50 = 1,990
re
total of Final Sales, inter-industry transactions would be

100 (25 + 40 + 15)
100 (10 + 30 + 25)
80 (15 + 20 + 30)
Total
=
=
=
=
20
55
15
90
20
04
Th
e
Ic
fa
82. (c) The Total Output of B = 120.

Output from A and C and Captive Consumption = 40 + 30 + 20 = 90.
Value added = 120 90 = 30.
83. (e) Given saving Income Ratio
= 0.24 = 24%
Incremental Capital Output Ratio = 6%
Rate of growth of national income
= Saving Income Ratio/Incremental Capital Output Ratio = 24% / 6% = 4%
Rate of growth of Per Capita Income
= Rate of growth of National Income Rate of Growth of Population.
= 4 3 =1%.
84. (c) Growth rate of real output = 6%
Elasticity of money demand = 0.5
Growth in money stock needed in the economy to reach long run equilibrium = 6 0.5 = 3%
223
Macroeconomics
Actual growth rate in nominal supply of money = 5%

Rate of inflation in long run equilibrium = 5% 3% = 2%
Rate of growth of Nominal Income
= Real Growth in Output + Rate of Inflation = 6% + 2% = 8%.
85. (b) The National Income in the economy
= Total Final Output in the economy
= Sales to Household Sector.
The Sales to Household Sector by X, Y, and Z industries are as follows:
04
04
X = 200 (50 + 80 + 30) = 40
20
Y = 240 (20 + 60 + 50) = 110
04
Z = 160 (30 + 40 + 60) = 30
M
AC
National Income = 40 + 110 + 30 = 180.

86. (e) Value added in Industry Y
ef
.N
o.
= Output of Y Input from the other industries.

= 240 (80 + 60 + 40) = 240 180 = 60.
-4
87. (d) GDP at factor cost
4-
02
27
= Factor Income received by personal sector from business sector and Government Sector
+ Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad.
1-
:8
88. (a) GNP at Factor Cost
31
= 1,064 + 64 + 104 +30 = 1,262.
BN
GDP at Factor Cost
se
rv
ed
.IS
= Factor Income Received by Personal Sector from Business Sector and Government Sector
re
= 1,064 + 64 + 104 +30 = 1,262
ht
GNP at Factor Cost = 1,262 + ( 30) = 1,232 GNP at Factor Cost.
lr
ig
89. (e) GNP at Market Price = GNP at FC + Indirect Taxes Subsidies
GDP at Factor Cost
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
GNP at Factor Cost

= GDP at Factor Cost + Net Factor Income from Abroad GDP at Factor Cost
= Factor Income Received by Personal Sector from Business Sector and Government Sector
= 1,064 + 64 + 104 + 30 = 1,262
GNP at Factor Cost = 1,262 + ( 30) = 1,232
GNP at Market Price = 1,232 + 130 0 = 1,362.
90. (a) GDP at Market Price = GDP at FC + Indirect Taxes Subsidies.
= Factor Income Received by Personal Sector from Business
Sector and Government Sector + Savings of Business Sector
+ Profit Tax paid by Business + Dividends paid Abroad.
= 1,064 + 64 + 104 +30 = 1,262
GDP at Market Price
= 1,262 + 130 0 = 1,392.
91. (c) Personal Disposable Income = Personal Income Personal Taxes + Transfer Payments
Personal Taxes
= 1,064 168 + 16 = 912.
92. (e) Depreciation = GNP at Market Price NNP at Market Prices = 1,07,000 1,00,000 = 7,000.
93. (d) Net Factor Income from Abroad = NNP at Market Price NDP at MP
= 1,00,000 1,00,422 = 422.
224
Part II
94. (a) Subsidies
= GNP at FC + Indirect Taxes GNP at Market Prices

= 95,000 + 14,000 1,07,000 = 2,000.
95. (b) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies.
Subsidies =
=
NDP at FC =
GNP at FC + Indirect Taxes GNP at Market Prices.

95,000 + 14,000 1,07,000 = 2,000
1, 00,422 14,000 + 2,000 = 88,422.
96. (e) National Income = NNP at Factor Cost.

04
= GNP at FC + Indirect Taxes GNP at Market Prices
04
Subsidies
20
= 95,000 + 14,000 1,07,000 = 2,000.
B
W
= 88,000.
M
AC
National Income
04
= 1,00,000 14,000 + 2,000

97. (a) Personal Income = National Income Corporate Profit Tax Retained Profit.
o.
ef
.N
National Income

= GNP at FC + Indirect Taxes GNP at Market Prices.
31
4-
= 1,00,000 14,000 + 2,000
02
= 95,000 + 14,000 1,07,000 = 2,000
27
-4
Subsidies
= 88,000
Personal Income
= 88,000 6,500 30,000 = 51,500.
BN
:8
1-
National Income
.IS
98. (c) Personal Disposable Income = Personal Income Personal Income Tax.
= National Income Corporate Profit Tax Retained Profit
National income
re
se
rv
ed
Personal Income
ht
NNP at Factor Cost = NNP at Market Price Indirect taxes + Subsidies.

= GNP at FC + Indirect Taxes GNP at Market Prices.
lr
ig
Subsidies
ty
Personal Income
= 88,000
Pr
es
National Income
s.
Al
= 95,000 + 14,000 1,07,000 = 2,000 = 1,00,000 14,000 + 2,000

= 88,000 6,500 30,000 = 51,500
ve
rs
i
Personal Disposable Income = 51,500 10,000 = 41,500.
iU
ni
99. (d) GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect Taxes.
Ic
fa
= 4,73,246 +61,809 19,431 + 87,043 = 6,02,667.
20
04
Th
e
100. (a) NNP at Market Price = GNP at MP Depreciation.

GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect taxes.
= 4,73,246 + 61,809 19,431 + 87,043 = 6,02,667
NNP at Market Price = 6,02,667 61,809 = 5,40,858.
101. (e) NDP at Market Price
= NNP at MP Net Factor Income from Abroad
NNP at Market Price = GNP at MP Depreciation.
GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect taxes.
= 4,73,246 +61,809 19,431 + 87,043 = 6,02,667.
NNP at Market Price = 6,02,667 61,809 = 5,40,858.
NDP at Market Price = 5,40,858 ( 6,833) = 5,47,691.
225
Macroeconomics
102. (b) NDP at Factor Cost
= NNP at FC Net Factor Income from Abroad.

= 4,73,246 ( 6,833) = 4,80,079.
103. (d) GNP at Factor Cost
= NNP at FC + Depreciation.
= 4,73,246 + 61,809 = 5,35,055.
104. (a) Personal Disposable Income = Personal Income Personal Income Tax.
NNP at MP + Depreciation
1,70,992 + 11,888 = 1,82,880
04
=
=
20
GNP at MP
04
Personal Income = 4,73,246 7,300 6,758 = 4,59,188

Personal Disposable Income = 4,59,188 9,759 = 4,49,429.
105. (c) GNP at MP = GNP at FC + Indirect Taxes Subsidies. (OR)
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
Thus, GNP at MP = 1,79,930 + X 588

1,82,880
=
1,79,930 + X 588
X
=
3,538
Thus the Indirect Taxes = 3,538
GDP at FC
=
NDP at FC + Depreciation
=
1,64,182 + 11,888 = 1,76,070
GNP at FC
=
GDP at FC + Net Factor Income from Abroad
1,79,930
=
1,76,070 + X
X
=
3,860.
Hence Net Factor Income from Abroad = 3,860.
106. (a) GDP at FC
= Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector +
Profit Tax + Retained Profit.
= 447 + 60 + 40 + 52 + 32 = 631.
107. (c) GNP at Factor Cost
= GDP at FC + Net Factor Income from Abroad.
GDP at FC = Wages and Salaries from Business + Dividends + Wages and Salaries from
Govt. Sector + Profit Tax + Retained Profit.
= 447 + 60 + 40 + 52 + 32 = 631
GNP at FC = 631 + ( 15) = 616.
iU
ni
ve
rs
i
ty
108. (e) GNP at Market Price
Ic
fa
GNP at FC
20
04
Th
e
GDP at FC
= GNP at FC + Indirect Taxes Subsidies

= GDP at FC + Net Factor Income from Abroad
= Wages and Salaries from Business + Dividends + Wages and Salaries

from Govt. Sector + Profit Tax + Retained Profit.
= 447 + 60 + 40 + 52 + 32
631
GNP at FC
= 631 + ( 15) =
616
GNP at MP
= 616 + 65 0 =
681.
109. (c) GDP at MP = GDP at Factor Cost +Indirect Taxes Subsidies.

GDP at FC
GDP at MP
226
Wages and Salaries from Business + Dividends + Wages and Salaries

from Govt. Sector + Profit Tax + Retained Profit.
447 + 60 + 40 + 52 + 32 = 631
631 + 65 0 =
696
Part II
110. (b) Personal Disposable Income = Personal Income Personal Taxes.

= Factor Incomes + Transfer Payments Personal Income
Tax.
= 532 + 8 84 = 456.
111. (a) GNP at MP =NNP at FC + Depreciation + Indirect taxes Subsidies.
= 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000.
112. (e) NNP at MP = GNP at MP Depreciation
GNP at MP
= NNP at FC + Depreciation + Indirect taxes Subsidies
04
= 9,04,000 92,700 = 8,11,300.
20
NNP at MP
04
= 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000
B
W
=
NNP at MP = GNP at MP Depreciation
=
NNP at FC + Depreciation + Indirect taxes Subsidies.
=
7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000
NNP at MP
=
9,04,000 92,700 = 8,11,300
NDP at Market Price = 8,11,300 (10,200) = 8,21,500.
114. (d) NDP at FC
= NNP at FC Net Factor Income from Abroad.
NDP at Factor Cost = 7,09,900 (10,200) = 7,20,100.
115. (a) GNP at FC
= GNP at MP Indirect Taxes + Subsidies
GNP at MP
= NNP at FC + Depreciation + Indirect Taxes Subsidies
= 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
NNP at MP
GNP at MP
04
113. (c) NDP at Market Price = NNP at MP Net Factor Income from Abroad.
= 9,04,000 1,30,500 + 29,100 = 8,02,600.
.IS
GNP at FC
se
rv
ed
116. (b) Personal Disposable Income = NNP at FC Corporate Taxes Retained Profit Personal
Income Tax
ig
ht
Personal Consumption Expenditure + Undistributed Corporate Profits

+ Corporate Income Tax + Personal Savings Transfer Payments by
Government + Personal Tax Payments + Depreciation.
1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260.
ty
GNP at FC
Pr
es
s.
Al
lr
117. (e) GNP at FC =
re
= 7,09,900 11,000 8,700 14,600 = 6,75,600.
ve
rs
i
118. (b) NNP at Market Price = GNP at FC Depreciation + Indirect Taxes

=
Personal Consumption Expenditure + Undistributed Corporate Profits +

Corporate Income Tax + Personal Savings Transfer Payments by
1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260
Th
e
Ic
fa
iU
ni
GNP at FC
20
04
GNP at FC
NNP at Market Price = 1,260 87 + 91 = 1,264.
119. (e) NNP at FC
= NNP at MP Indirect Taxes
NNP at Market Price = GNP at FC Depreciation + Indirect Taxes

GNP at FC
= Personal Consumption Expenditure + Undistributed Corporate Profits +

GNP at FC
= 1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260
NNP at Market Price = 1,260 87 + 91 = 1,264

NNP at FC = 1,264 91 = 1,173.
227
Macroeconomics
120. (d) Personal Income =
NNP at FC Undistributed Corporate Profit Corporate Income Tax

+ Transfer Payments
NNP at FC = NNP at MP Indirect Taxes

NNP at Market Price = GNP at FC Depreciation + Indirect Taxes.
GNP at FC
= Personal Consumption Expenditure + Undistributed Corporate Profits +

GNP at FC
= 1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260

1,260 87 + 91 = 1,264
NNP at FC
1,264 91 = 1,173
Personal Income
1,173 50 101 + 114 = 1,136.
04
20
04
04
NNP at Market Price =
121. (b) Personal Disposable Income = Personal Income Personal Tax Payment.
NNP at MP Indirect taxes
-4
NNP at Market Price = GNP at FC Depreciation + Indirect Taxes
ef
.N
NNP at FC
o.
M
AC
Personal Income = NNP at FC Undistributed Corporate Profit Corporate Income Tax

+ Transfer Payments
Personal Consumption Expenditure + Undistributed Corporate Profits

+ Corporate Income Tax + Personal Savings Transfer Payments
by Government + Personal Tax Payments + Depreciation.
GNP at FC
1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260
:8
1-
31
4-
02
27
GNP at FC
1,260 87 + 91 = 1,264
NNP at FC
1,264 91 = 1,173
Personal Income
1,173 50 101 + 114 = 1,136
se
rv
ed
.IS
BN
NNP at Market Price =
ig
ht
Wages and Salaries + Dividends + Rentals + Corporate Profit Tax +

Retained Earning + Net Factor Income from Abroad.
ty
123. (d) GDP at MP
5,000 + (600 +100) + 300 + 700 + 250 +100 = 7,050.
Pr
es
s.
Al
lr
122. (a) NNP at FC =
re
ve
rs
i
= NNP at FC + Depreciation Net Factor Income from Abroad + Indirect Taxes Subsidies
=
Wages and Salaries + Dividends + Rentals + Corporate Profit Tax +

Retained Earning + Net Factor Income from Abroad.
Ic
fa
iU
ni
NNP at FC
20
04
Th
e
= 5,000 + (600 + 100) + 300 + 700 + 250 + 100 = 7,050
Depreciation = Gross Investment Net Investment = 2,000 1,500 = 500

GDP at MP = 7,050 + 500 100 + 500 100 = 7,850.
124. (e) Personal Disposable Income
= Personal Consumption + Personal Savings
Personal Consumption
= Personal Disposable Income Personal Savings.
= NNP at FC Corporate Profit Tax Retained Earnings

+ Transfer Payments Personal Income Tax Payments
= 7,050 700 250 +150 400 = 5,850
Personal consumption expenditure = 5,850 650 = 5,200.

228
Part II
125. (d) Personal Disposable Income = Personal income Personal taxes

= Factor incomes received by the household sector + Transfer payments Personal Taxes
= 632 + 21 94 = Rs.559 crore.
Note: Compensation to employees paid by the Government and profit distributed as
dividends by the firms are included in the factor income received by the household sector.
126. (b) Disposable Income = Personal Income Personal Taxes = 5,000 200 = 4,800 MUC.
127. (e) GDP deflator = Nominal GNP/Real GNP
35 2 =
65 6 =
60 5 =
40 4 =
50 3 =
Real GNP = 70 +390 + 300+160 + 150 = 1,070
360
40 5
200
50 4.50
225
04
04
20
04
B
W
ef
.N
60 6
520
-4
27
65 8
02
87.5
4-
31
35 2.5
70
390
300
160
150.
M
AC
o.
Nominal GNP
= 1,392.5/ 1,070 = 130.14 = 130.
BN
GDP deflator
:8
1-
Nominal GNP = 87.5 + 520 + 300 + 160 + 150 = 1,392.5
se
rv
ed
.IS
128. (b) National income = Compensation of Employees + Proprietors Income + Interest

Payments made by the Firms + Corporate Profits
re
= 2,325 + 135 + 323 + 170 + 43 = 2,996.
ht
129. (c) NNP at market price = GNP at market prices Depreciation

= NNP at market prices Indirect Taxes + Subsidies
s.
Al
NNP at factor cost
lr
ig
= 85,000 (6,000 4,000) = 83,000
Pr
es
= 83,000 3,000 + 1,000 = 81,000
ty
Net Factor Income from Abroad = 81,000 65,000 = 16,000 MUC.
ve
rs
i
130. (b) Growth rate of Real Income = Nominal Income Price Level = 6% 4% = 2%.
iU
ni
131. (b) Y = C + I + G
Th
e
Ic
fa
Or, Y = 100 + 0.75 (Y 0.20Y) + 80 + 150 ( Yd = Y T)

Or, Y = 0.75Y 0.15Y + 330
20
04
Or, Y = 0.60Y + 300

Or, 0.40 Y = 330
Or, Y = 825 MUC.
132. (c) Budget surplus for the economy = T G

= 0.20 (825) 150 = 165 150 = 15 MUC.
133. (a) M
X
= 0.10Y
= 420MUC
When the economy is opened to trade in goods and services with rest of the world, the
1
multiplier in the economy will be
1 + t +
where, marginal propensity to consumer
229
Macroeconomics
t tax
marginal propensity to import
1
1
1
=
=
= 2.
1 0.75 + ( 0.75 0.20 ) + 0.10 1 0.75 + 0.15 + 0.10 0.5
134. (e) Personal Income =

=
GNP at market price Depreciation Indirect taxes + Subsidies
1,700 190 173 + 20 = 1,357
Personal Income =
04
National Income
National Income Undistributed Corporate Profit Corporate Tax

+ Transfer Payments
1,357 28 75 + 242 = Rs.1,496 cr.
04
Multiplier =
04
20
135. (b) Net Factor Income from Abroad (NFIA)
= NNP at factor cost NDP at factor cost
M
AC
NDP at Factor Cost = 50,000 MUC
o.
NDP at Factor Cost = NDP market price Depreciation Indirect taxes + Subsidies
NFIA = 55,500 50,000
ef
.N
= 60,000 3,000 2,00 + 500 = 55,500
-4
= 5,500 MUC.
4-
Wages paid to domestic residents + Wages paid to foreigners

+ Interest payment on loans taken + Retained profits + Corporate tax
400 + 240 + 10 + 20 + 10 = 680
:8
1-
31
NDP at Factor Cost =
02
27
136. (c) NDP at market price = NDP at Factor Cost + Indirect Taxes
.IS
BN
NDP at market prices = 680 + 15 = Rs.695 cr.
Factor Income Received from Abroad + Exports Wages

Paid to Foreigners Imports Interest Payment on Loans
Taken
200 + 40 240 25 10 = Rs. 35 cr (deficit).
ht
re
se
rv
ed
137. (c) Current Account Balance =
GDP at Market Pr ice (Current year)

100
GDP Deflator (Current year)
1, 500
100 = 1,250 MUC.
120
ig
=
ve
rs
i
ty
Pr
es
s.
Al
lr
138. (b) Real GDP (current year)
ni
139. (e) Value added by factor of production
fa
iU
= Sales Intermediate consumption Indirect taxes + Subsidies
Th
e
Ic
Value added by Primary sector = 100 15 12 + 7 = 80
20
04
Value added by Secondary sector = 150 25 13 + 8 =120

Value added by Tertiary sector
= 130 15 17 + 7 = 105
NDP at factor cost = Sum of value added by Primary sector, Secondary sector and tertiary
sector
= 80 + 120 + 105 = 305
Depreciation
= 10 + 12 + 15
= 37
GDP factor cost
= 305 + 37
= 342 MUC.
140. (c) Wages and salaries paid by the government = Factor income received by households
(wages and salaries paid by the business sector + Dividends paid to house holds + Factors
income receive abroad)
= 160 100 10 20 = 30 MUC.
230
Part II
141. (a) National Income

=
Compensation of employees + Business interest payments + Rental income of persons

+ Corporate Profits + Proprietors Income.
1,866.3 + 264.9 + 34.1 + 164.8 + 120.3 = 2450.4.
142. (e) GNP = NNP + Capital Consumption Allowance

NNP = National Income + Indirect Taxes National Income
04
= Compensation of Employees + Business Interest Payments + Rental Income of Persons

+ Corporate profits + Proprietors income.
20
04
= 18,66.3 + 2,64.9 + 34.1 + 164.8 + 120.3 = 2,450.4
04
NNP = 2,450.4 + 266.3 = 2,716.7

The GNP is 3,073.1.
ef
.N
143. (c) We can find out the factor income received by the house hold sector
o.
M
AC
GNP = 2,716.7 + 356.4 = 3,073.1
1,475.0
Transfer payments
235.0
212.6
Factor incomes
(Balancing figure)
1,524.6
02
4-
Amount
72.0
BN
Personal savings
:8
1-
Personal Tax payments
27
-4
Cr
Amount
31
Dr
se
rv
ed
.IS
1,759.6
1,759.6
National Income = NNP at Factor Cost = NNP at market prices Indirect Taxes
re
Net National Product at Market Prices:
ht
NNP at Market Prices = GNP at Market Prices Depreciation
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
GNP at market prices = GNP at Factor Cost + Indirect taxes

GNP at Factor Cost = Factor incomes received by the household + Undistributed corporate
profits + Corporate income tax + Depreciation
= 1,524.6 + 75 + 212.4 + 175.8 = 1,987.8
GNP at MP
= 1,987.8 + 210.8
= 2,198.6
NNP at MP
= 2,198.6 175.8
= 2,022.8
National Income
= 2,022.8 210.8
= 1,812.
144. (a) Personal Disposable Income = Personal income Personal Income Tax Personal Income
=
Factor incomes + Transfer Payments
Factor incomes
Cr
Dr
Dr
Amount

Personal Tax payments
Personal savings
1475.0 Transfer payments
235.0
212.6 Factor incomes

(Balancing figure)
1524.6
72.0
1759.6
= 1524.6 + 235 = 1759.6
Amount
1759.6
= 1759.6 212.6 = 1547.

231
Macroeconomics
145. (b) We can calculate the factor income.

Dr
Cr
Amount
235
1,567
Amount
1,525 Transfer payments
205 Factor incomes
72
1,802
National Income = NNP at factor cost = NNP at MP Indirect taxes
Personal savings
1,802
= GNP at MP Depreciation
GNP at MP
= GNP at FC + Indirect taxes
GNP at FC
= Factor income received by the household + Undistributed corporate profits

+ Corporate Income tax + Depreciation.
04
20
04
04
NNP at MP
NNP at MP
= 2277 180 = 2097
o.
= 2062 + 215 = 2277
ef
.N
GNP at MP
M
AC
= 1567 + 95 + 220 + 180 = 2062
27
-4
National Income = 2097 215 = 1882.
02
146. (c) GNP at market prices
31
:8
ed
.IS
National Income
BN
GNP at market price is Rs.6,400
1-
= 6,000 + 800 400 = 6,000 + 400 = 6,400
4-
= GNP at Factor Cost + Indirect Taxes Subsidies
se
rv
NNP at Factor Cost = GNP at Factor Cost Depreciation = 6,000 400 = 5,600
re
National Income is Rs.5,600.
ig
ht
147. (c) GNP at FC = GDP at Factor Cost + Net income from Abroad
= NDP at FC + Depreciation
NDP at FC
= NDP at Market price Indirect taxes + Subsidies
Pr
es
s.
Al
lr
GDP at FC
ve
rs
i
ty
= 88,750 10,825 + 5220 = 83,145
= 83,145 + 5,220 = 88,365
GNP at FC
= 88,365 + (260) = 88,105.
iU
ni
GDP at FC
Ic
fa
148. (b) NDP at Market Price = NNP at Market Price Net Factor Income from abroad
= GNP at Market Prices Depreciation
GNP at Market price
= NNP at FC + Depreciation Subsidies + Indirect Taxes

= 4,82,220 + 62,725 20,150 + 85,450 = 6,10,245
20
04
Th
e
NNP at Market price
NNP at Market price
= 6,10,245 62,725 = 5,47,520
NDP at Market price
= 5,47,520 (6,800) = 5,54,320.
149. (d) GDP at FC = NDP at FC + Depreciation = 1,57,170 + 12,180 = 1,69,350

GNP at FC
= GDP at FC + Net Factor Income from Abroad
1,72,250
= 1,69,350 + X
1,72,250 1,69,350 = X
X
232
= 2,900.
Part II
150. (b) National Income = NNP at Factor Cost

NNP at FC = NNP at MP Indirect Taxes
NNP at MP = GNP at FC Depreciation + Indirect Taxes
GNP at FC = Personal consumption expenditure + Undistributed corporate profit +
Corporate Income Tax + Personal Savings Transfer payments by
= 1,300 + 72 + 116 + 45 124 + 112 + 98 = 1,619
NNP at MP = 1,619 98 + 105 = 1,626
04
NNP at FC = 1,626 Indirect taxes = 1,626 105
04
National Income = 1,521.
04
20
151. (c) National Income = NNP at Factor Cost
o.
= Rs.1,90,000 + 28,000 2,14,000 crore = Rs.4,000 crore
M
AC
Subsidies = GNP at Factor Cost + Indirect Taxes GNP at Market Prices
= NNP at Market Prices Indirect Taxes + Subsidies
ef
.N
National Income = 2,00,000 28,000 + 4,000 = 1,76,000 crore.
-4
152. (b) Personal Disposable Income = Personal Income Personal Income Tax
27
Personal Income = National Income Corporate Profits Taxes Retained Profits
4-
02
National Income = NNP at Factor Cost = NNP at Market Prices Indirect Taxes + Subsidies
1-
31
Subsidies = GNP at Factor Cost + Indirect Taxes GNP at Market Prices
:8
= Rs.1,90,000 + 28,000 2,14,000 crore = Rs.4,000 crore
BN
National Income = 2,00,000 28,000 + 4,000 = 1,76,000 Crores
ed
.IS
Personal Income = 1,76,000 13,000 60,000 = 1,03,000
se
rv
Personal Income = 1, 03,000 20,000 = 83,000.
re
153. (a) National income = NNP at Factor Cost
ht
lr
ig
Pr
es
s.
Al
GNP at Market Price = GNP at FC + Indirect Taxes Subsidies

= 1,14,605 + 16,745 2,865 = 1,28,485
ve
rs
i
ty

iU
ni
National Income
= 1,06,440.
20
04
Th
e
Ic
fa
154. (c) House hold sector account

Dr.
Personal savings
Rs.
1,675 Transfer Payments
Factor incomes
210 (Balancing figure)
72
1,957
National Income
NNP at Factor Cost
= NNP at Market Price Indirect Taxes
Cr
Rs.
320
1,637
1,957

GNP at Market Price = GNP at Factor Cost + Indirect Taxes
GNP at Factor Cost = Factor income received by the households + Undistributed corporate
profits + Corporate Income Tax + Depreciation
233
Macroeconomics
= 1,637 + 112 + 240 + 182 = 2,171

GNP at Market Price = 2,171 + 230 = 2,401
NNP at Market Price = 2,401 182 = 2,219
NNP at Factor Cost
= 2219 230 = 1,989
National Income
= 1,989.
155. (e) NNP at Factor Cost
04
= GDP at Market Price + Net Factor Income from Abroad Depreciation + Subsidies
Indirect Taxes
04
= GDP at Market price 625 2,250 + 1,200 2,100
04
20
= GDP at MP 3,775
GNP at FC + Indirect Taxes.
Factor Income Received by the Household + Undistributed Corporate

Profit + Corporate Income Tax + Depreciation
1375.6 + 80 + 202.4 + 173.6
GNP at FC
1831.6
GNP at MP
1831.6 + 180.8 = 2012.4.
4-
31
157. (c) NNP at Market Price = GNP at MP Depreciation.
02
27
-4
ef
.N
o.
GNP at FC
M
AC
156. (a) GNP at MP =
GDP at market Price NNP at Factor Cost = 3,775.
= GNP at FC + Indirect Taxes.
GNP at FC
= Factor income received by the household + Undistributed Corporate Profit

+ Corporate Income Tax + Depreciation
.IS
BN
:8
1-
GNP at MP
ed
= 1,375.6 + 80 + 202.4 + 173.6

= 1,831.6
GNP at MP
= 1,831.6 + 180.8 = 2,012.4
re
se
rv
GNP at FC
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
NNP at Market price = 2,012.4 173.6 = 1,838.8.

158. (e) National Income = NNP at Factor Cost
= NNP at MP Indirect Taxes
NNP at Market Price = GNP at MP Depreciation.
GNP at MP
= GNP at FC + Indirect Taxes.
GNP at FC
= Factor Income Received by the Household + Undistributed Corporate
Profit + Corporate Income Tax + Depreciation
= 1,375.6 + 80 + 202.4 + 173.6
GNP at FC
= 1,831.6
GNP at MP
= 1,831.6 + 180.8 =2,012.4
NNP at Market Price = 2,012.4 173.6 = 1,838.8
NNP at FC
= 1,838.8 180.8
National Income
= 1,658.
159. (b) Personal Income = Factor Incomes + Transfer Payments
= 1,375.6 + 228 = 1,603.6.
160. (d) Personal Disposable Income
= Personal Income Personal Income Tax.
Personal Income = Factor Incomes + Transfer Payments
= 1,375.6 + 228 = 1,603.6
Personal Disposable Income = 1,603.6 203.6 = 1,400.
234
Part II
04
20
04
04
161. (c) Marginal Propensity to Save (MPS) = 0.25

Multiplier = 1/MPS = 1/0.25 = 4
Total increase in expenditure = 50 .40 + 120
(Govt. and Individual)
= 140
Increase in GNP = (Increase in G + Increase in I) /MPS 140 4 = 560.
Present GNP = C + I + G = 1200 + 200 + 50 = 1,450
Revised GNP = 1,450 + 560 = 2,010.
162. (c) Multiplier = 1/(MPS+MPI)
Multiplier = 1/(0.25+1) = 2.857.
163. (a) Change in level of Income = 100 Multiplier
= 100 2.857 = 285.7.
M
AC
164. (c) Change in level of imports = MPI Increase in Income.
ef
.N
= 0.10 Change in Level of Income
o.
= 0.10 Multiplier
= 100 Multiplier = 100 2.857 =285.7
-4
Change in Level of Income
02
41:8
BN
= 0.15Y
Substituting above figures in equation:
.IS
Import Function
ed
= 0.35Y
31
Consumption Function = 20 + 0.78Yd

Tax Function
27
Change in Level of Imports = 0.10 285 = 28.57.

165. (a) GNP (Y) = C+ I + G + (X M)
= 20 + 0.78Yd + 45 + 18 + 20 0.15Y
se
rv
re
= 20 + 0.78 [(Y T) + R] + 45+18 + 20 0.15Y
ig
ht
= 20 + 0.78 [(Y 0.35Y) + 8] + 45 +18+ 20 .15Y

= 169.89
Pr
es
s.
Al
lr
= 20 + 0.507Y + 6.24 + 45 + 18 +20 0.15Y = 109.24 + .357Y

Taxes = (169.89) (0.35) = 59.46
ve
rs
i
ty
Budget Surplus = Taxes (Govt. expenditure + Transfer payments)

59.46 (18 + 8)
ni
fa
iU
Surplus = 33.46.
Th
e
Ic
166. (e) Investment multiplier =
1
1 (1 t ) +
= MPC = 0.75; t = 0.20,
20
04
Y
I
multiplier =
= 0.1;
Multiplier =
[1 0.75 0.8 + 0.1]
1
= 2.
0.5
167. (b) Multiplier

= 1/MPS = 1/0.35 = 2.85
The total increase in investment and government expenditure
= 160 + 180 = 340
The increase in GNP = 340 2.85 = 969
235
Macroeconomics
04
The actual GNP

= C + I + G + E M = 1,000 + 400 + 500 + 200 180 = 1,920
GNP after the change in G and I =1,920 + 969 = 2,889
Since potential GNP = 2,500
Increase in Price
= (2,889/2,500) 1 100 = 15.56%.
168. (d) MPS = 0.30
MPI
= 0.10
Multiplier = 1/(MPS + MPI) = 1/(0.3 + 0.1) = 2.5
When autonomous investment increases by 560, the income will increase by
560 2.5 = 1,400
20
04
So Increase in Import will be 0.10 1,400 = 140.
= 530 + 0.75Y
Y 0.75Y
= 530
0.25Y = 530
= 530/0.25 = 2,120
= 250 + 0.75Y + 65 + 0.15Y + 90 +125 0.15Y
ef
.N
o.
M
AC
04
169. (a) Income (Y) = C + I + G + X M
When the export increases by 25, the Change in Equilibrium Income will be as follows:
27
-4
0.25Y = (530 + 25) = 555
4-
02
Y = 555/0.25 = 2,220.
400
360
0.80
500
400
0.72
600
580
0.90
700
670
90.00
.IS
ed
se
rv
re
s
ht
In each case C 40 = bYd
1-
MPC
:8
BN
Yd
31
170. (d)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
Hence b = MPC = C 40/Yd.

171. (c) Equilibrium Income in the beginning
= 2,000 (1)
Income Tax Rate
= 20%
T
= 0.2Y
Marginal Propensity to Consume = 0.85
C = 0.85Yd
Propensity to Import = 0.1 M = 0.1Y
Further Yd
=YT
Yd = Y 0.2Y
C = 0.85 (Y 0.2Y) = 0.85 Y 0.17 Y
= 0.85Y 0.17Y = 0.68 Y
Y =C+I+G+XM
Y = 0.68Y + I + G + X 0.1Y
Hence Y(1.1 0.68) = I + G + X
0.42 Y = I + G + X
Hence Government Expenditure Multiplier i.e., Gt/Y
= 1/0.42
Thus when G increases by 200, Y increases by 200/0.42 = 476.2
New income is 2,000 + 476.2 = 2,467.2.
236
Part II
172. (a) At the steady state level of consumption

Ct
= Ct 1
The given Ct
= 10 + 0.6Ydt + 0.3 Ct 1
Since Ct
= Ct1 in steady state.
Then Ct
= 10 + 0.6 Ydt + 0.3 Ct
Ct 0.3 Ct
= 10 + 0.6Ydt
Ct
= 1/0.7 [10 + 0.6Ydt]
When Ydt increases from 100 to 120, the change in the steady State Level of Consumption is:
04
1/0.7 [10 + 0.6 120] 1/0.7 [10 + 0.6 100] = 0.6/0.7 (120 100) =17.14.
20
04
173. (d) Y = C + S
04
YC=S
GDP of an economy is
M
AC
Y = C + I + G + X M ... (1)
o.
C = Consumption Function
ef
.N
I = Investment Function
G = Exogenous Government Expenditure
27
-4
X = Exogenous Exports
4-
02
M = Imports
31
S = 50 + 0.25Y
:8
1-
M= 0.10Y
BN
So, C = 50 + 0.75Y
ed
=C+I+G+XM
= I + G + X M ..(2)
ht
or S
re
or Y C = I + G + X M
se
rv
.IS
Equation (1) can be written as
lr
ig
Substituting the value of S and M in equation (2) we get

= I + G + X 0.10Y
0.35 Y
= 50 + I + G + X
= 1/0.35 (50 + I + G + X)
ty
Pr
es
s.
Al
50 + 0.25Y
ni
ve
rs
i
There is an increase in private investment by 200 and Government Expenditure decreases by 60.
= 1/0.35 (200 60) = 400
fa
iU
So there is an increase in GDP of 400.
20
04
Th
e
Ic
174. (b) GDP or Y = C + I + G + E M

Since i is the level of interest in the economy is given as 4. The equilibrium level of income
can be derived as follows:
Y
= 200 + 0.6Y + 0.3 Y 15(4) + 100 + 50 0.1Y
= 350 60 + 0.8Y
0.2Y = 290
Y
= 290/0.2 = 1,450
The equilibrium level of the income in the economy is 1,450.

175. (c) C = Consumption Function
= 200 + 0.6Y; a + bY
I
= Investment Function
= 0.3 Y 15 I; w Y pi
237
Macroeconomics
(Where I is Exogenously Determined)

G
= 100; G
= 50; E
= Import Function = 0.1Y; mY
The identity is,

Y
=C+I+G+EM
= a + bY + wY pi + G + E mY
04
Taking all terms in Y to L.H.S:
20
04
Y bY wY + mY = a pi + G + E
B
M
AC
o.
ef
.N
1
1
=
= 5.
1 0.6 0.3 + 0.1 0.2
-4
1
1 b w + m
The multiplier for the economy is =
1
(a pi + G + E )
(1 b w + m)
27
02
04
Y (1 b w + m) = a pi + G + E
31
4-
176. (a) Multiplier in the economy = 1/ [1 MPC + MPI]
:8
1-
= MPC = 0.90 = MPI = 0.1.
BN
Multiplier = 1/ (1 0.90 + 0.10) = 5
.IS
With an autonomous increase in investment of 200, the level of income will increase by,
se
rv
ed
= 5 200 = 1,000.
177. (e) Long run propensity to consume = 0.60/1 0.20 = 0.75
re
Steady level of consumption is
ig
ht
200 = 25 + 0.75 (200) = 175
s.
Al
lr
Steady Level of Consumption when Disposable Income is 250.
Pr
es
= 25 + 0.75 (250) = 212.50
ty
So, Steady State Level of Consumption increased by 37.50 (250 212.50).
ve
rs
i
178. (b) Long-run propensity to consume = 0.611/1 0.276 = 0.8439
ni
Change in the Steady Level of Consumption when Disposable Income increase from 500 to 600 is
fa
iU
= 0.8439(600 500) = 84.39.
20
04
Th
e
Ic
179. (e) Y = C + I + G + X M
= 8 + 0.85Yd +20 +10 +10 0.10Y

= 8 + 0.85 [(Y T) + R] + 20 + 10 + 10 0.10Y
= 8 + 0.85 [(Y 0.2Y) + 5] + 20 + 10 + 10 0.10Y
= 8 + 0.85 [0.8Y + 5] + 20 + 10 +10 0.10Y
= 8 + 0.68Y + 4.25 + 20 + 10 +10 0.10Y = 52.25 0.58Y
Y 0.58Y = 52.25
0.42Y
= 58.25
Y=
52.25
= 124.40
0.42
Taxes = 124.40 0.2 = 24.88

238
Part II
Budget Deficit = Govt. Expenditure + Transfer Payments Taxes

= 10 + 5 24.88 = 9.88.
180. (a) Increase in Income at the Equilibrium Level = 4,500 900 = 3,600
Increase in Consumption at the Equilibrium Level = (4,500 1,080) 900

= 3,420 900 = 2,520
Marginal Propensity to Consume (MPC)
= Change in Consumption/Change in Income.
20
1
1
=
= 3.33.
1 MPC
1 0.7
04
Multiplier in the Economy
04
04
C
2,520
=
0.7
3, 600
Y
M
AC
181. (b) Y = C + I + G + E M
= Government Expenditure.
= Exports
= Import Function
ef
.N
= Investment Function
-4
= Consumption Function
= 15
= 0.1
= 150
= 20
= 0.05
s
ht
ig
lr
s.
Al
Pr
es
ty
=
fa
iU
ni
20
04
Th
e
Ic
1-
.IS
= (1 0.3) = 0.7
ed
se
rv
= 400
re
ve
rs
i
where,
BN
Y= + Y + R + + Y + G + E Y
:8
The Equilibrium Income is also expresses as;
31
4-
02
27
o.
where, Y = Equilibrium Income in the Economy.
+ R + G + E
(1 +)
1
[400 + (0.7 45) + 150 + 2015]
(1 0.7 0.1 + 0.05)
1
616.5 = 2,466.
0.25
182. (c) When the consumption is at a Steady State Level Ct = Ct 1
Consumption Function is
Ct
= 20 + 0.75 Ydt + 0.15 Ct
0.85 Ct = 20 + 0.75Ydt
Ct
= 23.53 + 0.88Ydt
C t
= 0.88 x Ydt
239
Macroeconomics
If Ydt increases from 700 to 900,

Y d t = 200
C t = 0.88 200 = 176

The Steady State Level Consumption increases by 176.
183. (e) Equilibrium Level of Income or Y
C0 T + I + G + E M 0
1 +
04
20
W
04
1
1
=
= 3.33.
1 0.8 + 0.1
1 +
M
AC
184. (a) Multiplier =
04
196
= 80 0.8 30 + 100 + 30 + 120 110 =
= 653.
0.30
[1 0.8 + 0.1]
185. (c) Y = C + I + G + E M
ef
.N
o.
or Y = C0 + Y + I + G + E M
-4
27
C0 + I + G + E M
1
= 140 + 0.8Y + 75 + 35 +30 25
31
1BN
.IS
ed
1
1 (1 t + )
se
rv
186. (c) Multiplier =
:8
255
= 1,275.
0.2
4-
02
re
or
Y Y = C0 + I + G + E M
MPC = 0.75,
ht
t = 0.20, = 0.1
s.
Al
lr
ig
1
1
=
= 2.
1 ( 0.75 0.8 ) + 0.1 0.5
Pr
es
Multiplier =
1
1
=
= 2.33.
1 0.9 + ( 0.9 0.2 ) + 0.15
1 + t +
ve
rs
i
ty
ni
188. (d) GNP Y = C + I + G + (X M)
Ic
fa
iU
= C0 + 0.9Y d + I+ G + X [M0 + Y]
Th
e
= 70 + 0.9 [Y (20 + 0.2Y)] + 90 + 65 + 80 [40 + 0.15Y]
20
04
= 70 + 0.72Y 18 + 90 + 65 + 80 40 0.14Y
Y = 247 + 0.57Y
Y=
247
= 574.42.
0.43
189. (e) Marginal Propensity to Consume (MPC) =
C 80
Y
Multiplier =
240
380 80 300
=
= 0.75
400
400
1
1
1
1
=
=
or
= 4.
1 MPC 1 1 .75 .25
Part II
1
1 +
190. (d) Multiplier in the economy =
= 0.80 (Consumption Function)
where,
= 0.10 (Import Function)

Multiplier =
1
= 3.33
1 08. + 0.10
Increase in Govt. Expenditure = 200
04
Impact on GNP = 200 3.33 = 666.66
04
There is an increase in GNP by 666.66.
04
20
1
1 +
191. (b) Multiplier in the economy =
M
AC
where, = 0.80 (Consumption Function)
ef
.N
1
= 3.33
1 08. + 0.10
Multiplier =
o.
= 0.10 (Import Function)
27
-4
Overall Increase in Expenditure = 300 50 = 250
41:8
.IS
BN
1
= 2.17
1 0.8 + 0.8 0.2 + 0.1
ed
31
1
1 + t +
Multiplier
02
Increase in GNP = 250 3.33 = 832.5.
se
rv
Increase in Income = [Increase in Govt. Expenditure + Increase in investment] Multiplier
re
= 90 2.17 = 195.3.
ht
ig
Yd
= 40 + Yd
193. (e) C
s.
Al
lr
= 800
Pr
es
MPC = 0.08
= 40 + 800 0.08 = 680.
ty
=YT
(2)
= 10 + 0.2Y
.... (3)
fa
Yd
ni
. (1)
iU
ve
rs
i
194. (a) C = 50 + 0.9Yd
Th
e
Ic
Writing 10 + 0.2Y for T in equation (2) we get
20
04
Yd
= Y (10 + 0.2Y)
= Y 10 0.2Y
..
(4)
Substituting Y 10 0.2Y for Y in equation (1) we get,

C
= 50 + 0.9(Y 10 0.2Y)
= 50 + 0.9Y 9 0.18Y
= 41 + 0.72Y
...
Further Y = C + I + G ..
(5)
(6)
where, C = function of Y: f(Y) = 41 + 0.72Y and I + G = I + G

Y(1 0.72) = 41 + I + G
241
Macroeconomics
41+ I + G
0.28
Given I = 50 and G = 40.

41 + 50 + 40
131
=
= 467.86.
0.28
0.28
195. (e) Marginal Propensity to Consume ( ) = 0.75
Proportional Tax Rate (t)
= 0.20
Increase in Govt. Expenditure ( G )
= 500
04
0.25 0.8
0.2
= (1 0.75) (1 0.20) 500 =
500 =
500 = 250.
1 0.6
.4
1 [0.75(1 0.20)]
04
(1 b) (1 t)
G
1 b (1 t)
M
AC
The budget deficit will be increased by 250.
ef
.N
-4
2
3
27
= C + I + G = + Y + I + G
02
o.
196. (a) Marginal Propensity to Consume or
MPC = =
31
4-
Y (1 ) = + I + G
BN
:8
1-
1
1
=
=3
2
1
1
3
.IS
Multiplier =
04
Increase in Budget Deficit due to Government Expenditure is given by:
re
The actual GNP prior to increase;
se
rv
The increase in GNP = 90 3 = 270
ed
The Total Increase in Investment and Government Expenditure: = 50 + 40 = 90.
ig
ht
= C + I + G = 500 + 100 + 100 = 700.
s.
Al
lr
Revised GNP = 700 + 270 = 970.

= 200 + 0.80Yd = 200 + 0.80 (Y 100) = 200 + 0.80Y 80 = 0.80Y + 120.
Pr
es
197. (a) C
=C+I+G
ty
= 0.80Y + 120 + 500 + 200
ve
rs
i
Or, Y
ni
Or, 0.20Y = 820
= 4,100.
fa
iU
20
04
Th
e
Ic
= 200 + 0.20Yd = 200 + 0.20 (Y 100)

= 200 + 0.20 (4100 100)
= 200 + 800 = 600 MUC.
198. (c) Savings Function S = 20 + 0.30Yd
C = 20 + 0.70Yd
At Y = 600, S = 20 + 0.30(600)
= 20 + 180 = 160 MUC.
199. (c) Y = C + I+ G
Y = 70 + 0.75Yd + 80 + 70
Y = 70 + 0.75 (Y 0.2 Y) + 80 + 70
Y = 70 + 0.75 Y 0.15 Y+ 80 + 70
242
20
Part II
Y = 220 0.6Y
Y = 550
Budget deficit = T G = 0.2 (550) 70
= 110 70 = 40 MUC.
200. (c) At equilibrium, S = I 50 + 0.3Y = 150 5i
Or, 50 + 0.3(500) = 150 5i

Or, 50 + 150 = 150 5i
Or, 5i = 50
04
04
Or, i = 10%.
20
201. (c) Ct = 10 + 0.5Yd t + 0.4C t1
04
In steady state Ct = C t1
M
AC
= 10 + 0.5Yd t + 0.4C t
Ct
Ct 0.4C t = 10 + 0.5Yd t
= 10 + 0.5Yd t
Ct
= 1/6 [10 + 0.5Yd t]
ef
.N
o.
0.6 Ct
27
-4
When Yd increases from 400 to 500,
02
Ct = 1/6 [10 + 0.5 (400)] 1/6 [10 + 0.5Yd t ]
31
4-
= 1/6 (210) 1/6 (500)
:8
1-
= 350 433.33 = 83.33
BN
Change in steady state consumption = 83.33 MUC.
ed
= 0.15Y
se
rv
.IS
202. (c) S = 50 + 0.25Y
re
MPS = 0.25
lr
ig
Multiplier = 1/(MPS + MPI)
ht
MPI = 0.15
s.
Al
= 1/(0.25 + 0.15) = 1/0.4 = 2.5
Pr
es
Increase in Government Expenditure
ve
rs
i
ty
= 500/2.5 = 200 MUC.
iU
ni
203. (c) The change in government spending if the government is committed to a balanced budget
to bring output to the full-employment level is
Ic
fa
700 600 = 100 MUC.
20
04
Th
e
The multiplier is 1/ MPS = 1/0.2 = 5

Change in government spending
= 100 / 5 = 20 MUC.
204. (b) Multiplier = 1/MPS = 1/0.25 = 4.
Current level of income Break-even income

= 16,000 12,000 = 4,000
Required saving in the economy
= 4,000/4 = 1, 000 MUC.
205. (d) Domestic savings = Private savings + Public savings
Private savings = 1500 (500) = 2000 MUC.

243
Macroeconomics
The answer is (d).

206. (b) Investment in period t
= 0.75 Desired investment in period t

Desired investment in period t
= Acceleration coefficient Change in income
= 2 200 = 400
Investment in period t
04
= 0.75 400 = 300 MUC.
04
The answer is (b).
M
AC
Y=C+S
ef
.N
o.
When S = 0, Y = C
Y = 400 + 0.75 Y
27
-4
or, 0.25Y = 400
02
Yd = 1,600
31
4-
c = 400 + 0.75 ( 1,600)
:8
1-
= 400 + 1,200 = Rs.1,600 cr.

209. (c) Y*
BN
= Rs.5,000
ed
se
rv
=a+bY
re
= 2,500
s.
Al
= 1,875.
lr
= 0.75 (2,500)
ht
ig
.IS
3
= 0.75
4
MPC
Pr
es
Borrowed amount = 2,500 1,875 = Rs.625.
ty
210. (b) S = 60 + 0.25Yd
ve
rs
i
At equilibrium level of income, S = I
iU
ni
60 + 0.25 Yd = 100
fa
or, Yd = 640 MUC.
Th
e
Ic
211. (b) Velocity of money = Y/Ms
20
04
= 750 + 250 + 150 + 100 + 50 150

= 1,150
Velocity of money =
1,150
= 5.
230
212. (a) MPC = = 2/3
=C+I+G
= + Y + I + G
Y(1 ) = + I + G
244
= 1/(1 0.75 + 0.75 0.2 + 0.10) = 2.

208. (c) Consumption function for an economy is estimated to be c = 400 + 0.75 Yd
04
20
207. (a) Multiplier = 1/(1 MPC + MPC Tax Rate + MPI)
Part II
Hence, Multiplier =
1
1
=
=3
1 1 2
3
The total increase in investment and government expenditure = 100 + 80 = Rs.180

The increase in GNP = 180 3 = Rs.540
The actual GNP prior to the increase
=C+I+G
= 1,000+ 200 + 200 = Rs.1,400
04
Revised GNP = Rs.1,400 + 540 = Rs.1,940
04
20
04
Since the potential GNP is only Rs.1,600, with the GNP going up to Rs.1940, the price level
will increase.
There will be an increase of 340 in GNP.
1
( G + I )
0.35
27
02
4-
ef
.N
1
1
=
0.15 + 0.20 0.35
-4
Multiplier =
o.
= 0.15
MPM
M
AC
213. (c) MPS = 0.20
:8
1
( 280 72 ) = 594.28.
0.35
BN
Y =
1-
31
There is an increase in private investment by 280 and decline in government spending by 72.
re
1
1
= 1/ (1 0.9 + 0.9 0.2 + 0.15) =
= 2.33.
0.43
1 +t +
ig
ht
se
rv
ed
.IS
The net result of change in both private investment and government spending is that it
increases the national product of GDP by 594.28.
s.
Al
lr
215. (b) Multiplier in the economy
1
1
=
= 3.33
1 + 1 0.8 + 0.10
ve
rs
i
ty
Increase in GNP
Pr
es
Overall increase in expenditure = 300 50 = 250
iU
ni
216. (a) Multiplier in the economy =
= 3.33 250 = 832.5.

1
1
=
= 2.17
1 + t + 1 08 + 0.8 0.2 + 0.1
20
04
Th
e
Ic
fa
Increase in income = Increase in (Government Expenditure + Investment) Multiplier

= (40 + 50) x 2.17 = 195.6.
217. (d) C = 50 + 0.9 Yd ......
(1)
d
where, Y = Y T
..
(2)
T
= 10 + 0.2Y
......
(3)
Writing 10 + 0.2Y for T in equation (2) we get
Yd
= Y (10 + 0.2Y) = Y 10 0.2Y ......
(4)
d
Substituting Y 10 0.2Y for Y in equation (1) we get
C
= 50 + 0.9(Y 10 0.2Y) = 50 + 0.9Y 9 0.18Y
C
= 41 + 0.72Y .... (5)
Further Y = C + I + G ..... (6)
where, C = f(Y) = 41 + 0.72Y and I + G = I + G
245
Macroeconomics
Y (1 0.72)
= 41 + I + G
41+ I + G
0.28
The equilibrium level of income can be determined if I and G are made known.
Given I = 50, and G = 40
Y
41+ 50 + 40
131
=
= Rs.467.86.
0.28
0.28
Proportional Tax Rate (t)
= 0.20
04
= 0.75
20
Marginal Propensity to Consume (b)
04
218. (e) Given,
04
Increase in Government Expenditure (G ) = 500
M
AC
Increase in Budget Deficit due to Increase in Government Expenditure is given by
=C+I+G
ef
.N
se
rv
ed
= +1+ G
re
1
1
=
=3
1 1 2
3
ig
ht
Hence, Multiplier =
-4
.IS
BN
= +Y +1+ G
Y (1 )
27
4-
02
2
3
1-
= =
31
219. (d) MPC
0.25 0.80
0.20
500 =
500 = 250.
1 ( 0.75 0.80 )
0.40
:8
o.
(1 b )(1 t )
(1 0.75)(1 0.20 )
G =
500
1 b (1 t )
(1 0.75) (1 0.20 )
s.
Al
lr
The total increase in investment and government expenditure = 50 + 40 = 90
Pr
es
The increase in GNP = 90 x 3 = 270

The actual GNP prior to the increase = C + I + G
ve
rs
i
ty
= 500 + 100 + 100 = Rs.700
ni
Revised GNP = Rs.700 + 270 = Rs.970.
iU
220. (c) Given
8 + 0.15 Yd
8 + 0.85 Yd
Tax function (T)
0.2Y
Import function (M)
0.10Y
20
10
Transport payments (R)
Exports (X)
10
fa
20
04
Th
e
Ic
Y=C+I+G+XM
= 8 + 0.85 Yd + 20 + 10 + 10 0.10Y
246
Part II
= 8 + 0.85 [(Y T) + R] + 20 + 10 + 10 0.10Y

= 8 + 0.85 [(Y 0.2Y) + 5] + 20 + 10 + 10 0.10Y
= 8 + 0.85 [0.8Y + 5] + 20 + 10 + 10 0.10Y
= 8 + 0.68Y + 4.25 + 20 + 10 + 10 0.10Y = 52.25 0.58Y
Y 0.58Y
= 52.25
0.42Y
= 52.25
= 124.40
Taxes
= 124.40 x 0.2 = 24.88
04
52.25
0.42
04
Y=
20
Budget deficit = Govt. expenditure + Transfer payments Taxes
= 0.10
W
-4
1
=5
1 0.90 + 0.10
27
02
Multiplier
M
AC
MPI
ef
.N
= 0.90
MPC
1
1 MPC + MPI
o.
221. (c) Multiplier in the economy =
04
= 10 + 5 24.88 = 9.88.
5 200
31
4-
With an autonomous increase in investment of 200, the level of income will increase by,
BN
The increase in imports will be 0.1 x 1,000 = 100.
:8
1-
= 1,000
.IS
222. (a) When the consumption is at a steady state level Ct = Ct1
se
rv
ed
Consumption function is
= 20 + 0.75Ydt + 0.15Ct
0.85Ct
= 20 + 0.75Ydt
Ct
= 23.53 + 0.88Ydt
Ct
= 0.88 Ydt
s.
Al
lr
ig
ht
re
Ct
Pr
es
If Ydt increases from 700 to 900

Ydt
ty
= 200
= 0.88 200 = 176.
ve
rs
i
Ct
iU
ni
The steady state level consumption increases by 176.
20
04
Th
e
Ic
fa
223. (d) Y
=C+I+G+EM
= C0 + Y+ I + G + E M
Y Y
Co + I + G + E M
= C0 + I + G + E M =
1
= 140 + 0.8Y + 75 + 35 + 30 25
225
= 1,275.
0.2
224. (e) C = 50 + 0.8Yd
..
(1)
where Y = Y T
..
(2)
..
(3)
= Y (10 + 0.3Y) = Y 10 0.3Y ..
(4)
= 10 + 0.3Y
Writing 10 + 0.3Y in equation (2) we get,

Yd
247
Macroeconomics
Substituting Y 10 0.3Y for Yd in equation (1) we get,

C
= 50 + 0.8(Y 10 0.3Y) = 50 + 0.8(Y 9 0.24Y)
= 41 + 0.56Y
Further Y = C + I + G
..
(5)
..
(6)
where C = f(Y) = 41 + 0.56Y and

= I+G
I+G
Y(1 0.56)= 41 + I + G
04
41+ I + G
0.44
04
20
04
The equilibrium level of income can be determined if I and G are known.
M
AC
Substitute the given values of I and G .
225. (c) Savings is equal to investment at equilibrium. Therefore,
27
S = 500 + 0.2Y = I = 100
31
4-
02
0.2 Y = 600
= 3,000.
1-
.IS
ed
s
ht
= 0.10
s.
Al
MPS = 1/10
re
1
=10
MPS
se
rv
Y 200
= 10
=
I
20
ig
= 20 lakh
lr
Multiplier (K) =
BN
Change in Investment ( I )
:8
226. (a) Change in income ( Y ) = 200 lakh
ef
.N
= 331.8.
-4
o.
41+ 60 + 45
146
=
0.44
0.44
ty
C
Y
ve
rs
i
227. (d) MPC =
Pr
es
MPC= 1 MPS = 1 0.10 = 0.90.
Ic
fa
iU
ni
C is the change in consumption and Y is the change in Income =
20
04
Th
e
Multiplier (K) =
1
1
= 10
=
1 MPC 1 0.9
When investment increases by Rs.100 crore, change or increase in aggregate income (Y)
and aggregate consumption is
Y = K I
K= I
228. (c) GNP (Y)
= 10 100 = 1,000 crore.

= C + I + G + (X M)
= 20 + 0.75 Yd
Tax function
= 0.3 Y
Import function
= 0.18 Y
Substituting above figures in equation

248
900
= 0.90
1,000
Part II
Y = 20 + 0.75 Yd + 50 + 20+ 22 0.18Y

= 20 + 0.75 [(Y T) + R] + 50 + 20 + 22 0.18Y
= 20 + 0.75 [(Y 0.30 Y) + 10] + 40 + 20 + 22 0.18Y
= 20 + 0.525Y + 7.5 + 50 + 20+ 22 0.18Y
Y = 119.5 + 0.345Y
Y = 182.44
Taxes= 0.30 182.44 = 54.73
Taxes (Government expenditure + Transfer payments)
54.73 20 + 10
20
04
04
Budget deficit/surplus
04
Surplus = 24.73.
M
AC
229. (d) MPC =
= C 90/Yd
ef
.N
-4
1
1
=
1 .76
1 MPC
27
Multiplier =
o.
= 850 90/1000 = 0.76
31
1-
ed
se
rv
1
= 2.70
1 0.78 + 0.15
re
.IS
= 0.15 (import function)
BN
where = 0.78 (Consumption function)
4-
1
1 +
:8
230. (b) Multiplier in the economy =
02
Multiplier = 4.17.
ig
ht
Overall increase in expenditure = (500 75) = 425

= 425 x 2.70 = 1147.5.
s.
Al
lr
Increase in GNP
Pr
es
231. (e) We know that Y = C + I + G + X M
= 280 + 0.75Y + 75 + 0.15Y + 94 + 126 0.20Y
= 575 + 0.75Y
ve
rs
i
ty
=2,300
iU
= 575
ni
0.25Y
20
04
Th
e
Ic
fa
When there is an exogenous increase in exports to the extent of 30, the change in equilibrium
income will be as follows:
0.25Y = (575 + 30) = 605

Y = 2,420
Increase in equilibrium income is 120
(i.e., 2,420 2,300)
Foreign trade multiplier: = Y/X = 120 /30

Foreign Trade multiplier = 4.
232. (c) Y = C + I + G + E M
where,
= Equilibrium income in the economy
= Consumption function
= Investment function
249
Macroeconomics
= Government expenditure
= Exports
= Import function
The equilibrium income is also expressed as

Y = + (Y + R ) + + Y + G + E Y
= 460
where,
= (1 0.3) = 0.7
04
= 18
20
04
= 0.1
04
G = 162
M
AC
R = 48
E = 25
ef
.N
+ R + G + E
-4
(1 + )
27
Y=
o.
= 0.05
4-
02
1
[ 460 + (480.7) + 162 + 48 18]
(1 0.7 0.1 + 0.05 )
BN
........
= 62 + 0.25Y ....
se
rv
= 2,742.4.
.IS
233. (d) I = 78 230i
:8
1
685.6
0.25
ed
1-
31
Y=
(1)
(2)
iU
Th
e
Ic
fa
20
04
s.
Al
= 560 88 = 472.
ni
= 560 880i
ve
rs
i
At I = 10%;
Pr
es
140
220
i
0.25 0.25
ty
lr
0.25Y = 140 220 i

Y
ht
ig
78 230i = 62 + 0.25 Y
re
Under equilibrium conditions (1) = (2)
Multiplier =
1
MPS + MPI
1
= 2.38
0.30 + 0.12
Change in level of income

= 150 2.38
= 357
Change in level of imports = MPI Increase in income

= 0.12 357 = 42.84.
235. (c) Increase in income at the equilibrium level
= 4,800 1,200 = 3,600
Increase in consumption at equilibrium
= (4,800 1,400) 1,200 = 2,200
Marginal Propensity to consume (MPC)
= Change in consumption/Change in income
250
Part II
= 3,600/2,200 = 0.6
Multiplier in the economy =
Multiplier
1
1
=
1 MPC 1 0.6
= 2.5.
236. (b) The equilibrium condition is given by
=C+I
= 40 + 0.75Y + 60
= 400
04
04
Y 0.75Y = 100
04
20
When Y = 400,
W
M
AC
= Income consumption
= 400,
Savings
= 40 + 0.25(400) = 40 + 100
= 60.
-4
Savings
o.
When income
ef
.N
Savings
= 40 + (0.75 400) = 340
02
27
237. (c) Planned savings equals Yd C
31
4-
= 50 + 0.80Yd,
Since C
:8
1-
= Yd (50 + 0.80Yd) = 50 + 0.20Yd
BN
The equilibrium condition is determined by equating planned savings and planned I.

= 80
0.20Y
= 130
= 130/.20
re
se
rv
ed
.IS
50 + 0.20Y
ig
ht
Equilibrium income = 650.
lr
1
1
=
= 2.85
MPS
0.35
Pr
es
s.
Al
Multiplier =
238. (e)
The total increase in investment and government expenditure = 150 + 175 = 325
= 325 2.85 = 926.25
The actual GNP
=C+I+G+EM
= 1,200 + 450 + 600 + 210 195 = 2,265
fa
iU
ni
ve
rs
i
ty
The increase in GNP
Th
e
Ic
GNP after the change in G and I = 2,265 + 926.25 = 3,191.25
20
04
Since potential GNP = 2,700

3,191.25
Increase in price level =
1 100 = 18.19 or 18.2%.
2, 700
239. (b) We know that Y = C + I + G + X M
= 270 + 0.75Y + 72 + 0.15Y + 120 + 140 0.13Y
= 602 + 0.77Y
0.23Y = 602
Y
= 2,617.4
When there is an exogenous increase in exports to the extent of 28, the change in equilibrium
income will be as follows:
251
Macroeconomics
0.23Y = (602 + 28) = 630

Y = 2,739.1
Increase in equilibrium income is 121.7
Foreign trade multiplier: = Y/X = 121.7/28 = 4.35.
Income Determination: Money and Interest

240. (d) GNP (Y) = C + I + G + E M
= 40 + 0.75Yd + 120 12i + 80 +60 0.1Y
04
= 40 + 0.75(Y T) + 120 12i + 80 + 60 0.1Y
04
= 40 + 0.75Y 0.15Y + 120 12i + 80 + 60 0.1Y = 300 + 0.5Y 12i
At equilibrium: Md
= Ms
6Y 2,200i
= 2,800
W
ef
.N
o.
M
AC
300 12i
= 600 24i
.5
Y 0.5Y = 300 12i

Y
27
-4
6(600 24i) 2,200i = 2,800
4-
02
3,600 144i 2,200i = 2,800
1-
31
2,344i = 800
:8
800
= 0.34
2,344
BN
I=
ed
.IS
GNP (Y) = 600 24i
se
rv
= 600 (24 0.34)
re
= 600 8.16 = 591.84.
ht
241. (b) The equation of the IS Curve is;
s.
Al
lr
ig
Y = 120 + .06 Y + 150 80i
Pr
es
Y = 270 + 0.6Y 80i

Y .6Y = 270 80i
.. (1)
ve
rs
i
ty
Y = 675 200i
The equation of the LM Curve is Ms = Md
Th
e
Ic
fa
iU
ni
300 = 0.3Y + 120 160i

Y = 600 + 533.33i
.. (2)
Putting the value of Y in equation one:
20
04
675 200i = 600 + 533.33i
733.33 i = 75
i =
75
= 0.10%.
733.33
242. (c) GNP or Y = C + G + I
= 100 + 0.75Yd + 200 + 50 12i

= 100 + 0.75[Y 0.20Y] + 200 + 50 12i
= 100 + 0.75Y 15Y + 200 + 50 12i = 350 + 0.60Y 12i
252
20
04
= 40 + 0.75 (Y 0.2Y) + 120 12i + 80 + 60 0.1Y
350 12i
= 875 30i = IS Curve
0.40
Part II
LM Curve:
Demand for Money = [Precaution + Transaction + Speculative Demand]
At equilibrium, Ms = 300.
300 = 20 + 0.10Y + 0.20Y + 130 30i = 150 + 0.30Y 30i
150 + 30i
0.30
= 500 + 100i
04
04
Equilibrium Level of Income is determined at the point where both goods and Money
Markets are in equilibrium simultaneously, which occurs at the point of interaction of the Is
and Lm Curves. So, we have,
04
20
875 30i = 500 + 100i
875 500 = 100i + 30i = 375/130 = 2.88
M
AC
GNP =Y = 875 (2.88 30) = 788.6.
o.
243. (a) Given Saving Function (S) = 270 + 0.20Yd
=C+I+G+EM
ef
.N
Consumption Function (C) = 270 + 0.80 Yd
27
-4
= 270 + 0.80Yd + 300 10i + 600 + 118 0.1Y
4-
02
= 270 + 0.80(Y 0.25Y) + 300 10i + 600 + 118 0.1Y
31
= 1,288 + 0.50Y 10i
:8
= 2,576 20i
BN
1-
0.5Y = 1,288 10i...IS Curve
ed
.IS
Demand for Money
se
rv
= Transactions and precautionary demand for money + Speculation demand for money.
re
= 0.22Y + 100 11i
ht
Supply of money in money market equilibrium = 320
s.
Al
0.22Y + 100 11i = 320
lr
ig
Demand for money (Md) = Supply of Money (Ms)
Pr
es
0.22Y = 320 100 + 11i = 220 +11i.. LM Curve

= 1000 + 50i
ve
rs
i
ty
iU
ni
Economy will be in equilibrium when Goods Market and Money Market are in simultaneous
equilibrium.
fa
Is Curve = LM Curve
20
04
Th
e
Ic
2,576 20i
= 1,000 + 50i
1,576
= 50 + 20i
1,576
= 70i
= 22.51%
Substituting the value of i in IS Curve equation,

Equilibrium Income (Y)
= 2,576 (20 22.51) = 2,125.80
GNP deflator
=
Nominal GNP in 1991-92

100
Real GNP in1991-92
253
Macroeconomics
3, 472
100 = 163.3.
2,125.80
244. (d) Y = C + I + G + E M
= 40 + 0.80Yd + 100 120i + 220 + 100 [5 + 0.1Y]

= 40 + 0.80(Y 0.2Y) + 100 120i + 220 +100 [5 + 0.1Y]
= 40 + 0.80Y 0.16Y + 100 120i + 220 + 100 [5 + 0.1Y]
= 455 + 0.54Y 120i
04
04
455 120i
0.46
Y =
04
20
= 989.13 260.87iIS Curve
Money Supply = Money Demand
M
AC
300 = 0.24Y + 150 10i

150 = 0.24Y 10i
o.
= 625 + 42i. LM Curve
ef
.N
Equating IS and LM functions:
-4
27
02
= 1.20%
= 675.40
:8
= 625 + (42 1.20)
ed
Y
675.40
=
= 2.25.
MS
300
se
rv
Velocity of Money =
.IS
BN
1-
Apply the value of I in to the LM Curve equation.
4-
= 302.87i
31
364.13
625 + 42i = 989.13 260.87i
ht
ig
Demand for money (Md)
re
245. (e) LM Curve:
Pr
es
= 0.20Y + 400 50i
s.
Al
lr
= Transaction demand for money + Speculative Demand for money
= Money Demanded
ve
rs
i
Money supply
ty
In equilibrium position:
iU
ni
600 = 0.20Y + 400 50i
Ic
fa
200 + 50i = 0.20Y
20
04
Th
e
1,000 + 250i = Y
Equating LM and IS functions:
2,400 40i
= 1,000 + 250i
1,400
= 290i
= 4.83
= 1,000 + (250 4.83) = 2,207.5
The new LM Curve is;

600 = 0.25Y + 400 50i
Y
= 800 + 200i
New equilibrium
254
Part II
2,400 40i = 800 + 200i

1,600
= 240i
= 6.67
= 800 + (200 6.67) = 2,134

C+I+G+EM
40 + 0.8Yd
40 + 0.8Yd + 200 10i + 300 + 0.12Y 5 0.1Y
40 + 0.8[Y 0.12Y] + 200 10i + 300 + 0.12Y 5 0.1Y
40 + 0.632Y + 200 10i + 300 + 0.12Y 5 0.1Y
535 + 0.652Y 10i
1537 28.7i
04
B
W
M
AC
04
20
246. (a) Y
04
Change in GNP = 2,207.5 2,134 = 73.5 (Decrease).
ef
.N
o.
LM Curve:
300
= 100 20i + 0.24Y
200 + 20i = 0.24Y
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Y
= 833 + 83i
1,537 28.7i = 833 + 83i
704
= 111.7i
i
= 6.30
In the problem;
Investment = 200 10i
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
= 200 (10 6.30) =137

If supply of money decreases to 220 the Lm Curve will shift to:
220
= 100 20i + 0.24Y
120 + 20i = 0.24Y
Y
= 500 + 83i
Equating LM and IS Curves:
500 + 83i = 1,537 28.7i
= 1,037 111.7i =
1, 037
= 9.28
111.7
fa
iU
ni
20
04
Th
e
Ic
As investment = 200 10i = 200 (10 9.28) = 107

The result will be increase in private investment (137 107) by = 30.
247. (d) 0.4Y = 800 8i IS Curve
0.4Y = 600 + 10iLM Curve
800 8i = 600 + 10i
i
= 200 + 18i =
200
= 11.1
18
[800 8 11.1]
= 1778
0.40
When exogenous investment increases by 150 the IS Curve equation becomes
255
Macroeconomics
Y=
1
(800 8i + 150)
0.4
Since 150 is an autonomous component, it has to be added to (800 8i) to get the multiplier effect.
Again equating LM and IS functions:
800 + 150 8i = 600 + 10i
i
350
= 19.4
18
20
04
04
0.4Y
= 800 + 150 8 19.4 = 794.4
Y
= 1,986
Change in equilibrium = 1,986 1,778 = 208.
M
AC
200
+ 4000i .IS Curve
p
1000
+1000i ..LM Curve
p
-4
600 = 140 +
ef
.N
o.
600 = 640 +
04
248. (c) There is simultaneous equilibrium in all markets at a 600 real income level. Therefore,
substituting Y = 600, Yd = 500/p and Ms = 200/p into the IS and LM equations respectively.
02
27
Solving the above two equations, we have
31
4-
i = 0.057
1-
p = 1.05
BN
:8
The price level must increase from 1 to 1.05 to eliminate the excessive spending.
Y = 840 4,000i.IS Curve
re
Y = 590 + 1,000i.. LM Curve
se
rv
ed
.IS
249. (b) If the price level is 1, the real money supply is 200 and real balances equal 200.
Substituting Yd = 500 and Ms = 200 into IS and LM equations respectively.
ig
ht
Solving these equations, we have

= 640
And, i
= 0.05.
s.
Al
Pr
es
ty
250. (a) IS Curve
lr
= 60 + 0.75 + (Y 24) + 250 200i + 24
ve
rs
i
iU
ni
= 334 + 0.75Y 18 200i
20
04
Th
e
Ic
fa
Y 0.75Y = 316 200i

= 1,264 800i
LM Curve
250
= 0.25Y + 134 500i
0.25Y
= 116 + 500i
= 464 + 2,000i
At equilibrium level, IS = LM
1,264 800i
= 464 + 2,000i
2,800i
= 800
= 0.29
Investment
= 250 200 (0.29) = 192
When money supply decreases by 75, the new LM Curve will be

256
Part II
175
= 0.25Y + 134 500i
0.25Y
= 41 + 500i
= 164 + 2,000i
And the IS Curve will remain the same.

164 + 2,000i
= 1,264 800i
2,800i
= 1,100
= 0.39
04
At equilibrium:
04
The changed level of investment = 250 200 (0.39) = 172
04
20
The change in investment = 192 172 = 20.
1
[G + I]
0.35
-4
27
o.
1
1
=
0.15 + 0.20 0.35
Multiplier =
M
AC
= 0.15
ef
.N
MPM
251. (a) MPS = 0.20
31
4-
1
[ 250 75] = 500.
0.35
:8
1-
02
The increase in private investment is by 250 and decline in government expenditure by 75.
ht
re
se
rv
M
=
p
ed
252. (b) Equilibrium in the asset market:
.IS
BN
The net result of changes in private investment and government expenditure is that, it
increases the GDP by 500.
lr
ig
0.20Y 5i = 300
= 300 + 5i
= 1,500 + 25iLM Curve
Pr
es
s.
Al
0.20 Y
ty
Equilibrium in the goods market:

=C+I+G
ve
rs
i
iU
ni
= 120 + 0.75(Y 150) + 420 10i + 150
fa
= 120 + 0.75Y 112.5 + 420 10i + 150
Ic
= 577.5 + 0.75Y 10i
Th
e
20
04
0.25Y= 577.5 10i

Y
= 2,310 40iIS equation
At equilibrium Y,
IS
= LM
2,310 40i = 1,500 + 25i

810
= 65i
= 12.46
Apply the value of i into LM Curve equation.
= 1,500 + 25 12.46 = 1,811.5.
253. (e) The IS function is:
Y =Y=C+I+G
257
Macroeconomics
Y = 120 + 0.75 +(Y 150) + 300 5i + 150

= 120 + 0.75Y 112.5 + 300 5i + 150 = 457.5 + 0.75 Y 5i
0.25Y = 457.5 5i
Y
= 1,830 20i..IS Curve equation.
M

p
= 1,500 + 25i..LM Curve equation.
04
= 300 + 5i
04
0.20Y 5i = 300
0.20 Y
04
20
Solve the IS and LM equation:
= 7.33
= 45i
M
AC
330
1,830 20i = 1,500 + 25i
ef
.N
o.
The interest rate is 7.33.
254. (c) Y = C + I + G
-4
= 120 + 0.75 + (Y 150) + 300 5i + 240
02
27
= 120 + 0.75Y 112.5 + 300 5i + 240
31
4-
= 547.5 + 0.75Y 5i
se
rv
ed
.IS
M
=
p
:8
= 2,190 20i...IS Curve
BN
1-
0.25Y = 547.5 5i
re
0.20Y 5i = 300
= 300 + 5i
= 1,500 + 25i.LM Curve equation.
s.
Al
lr
ig
ht
0.20 Y
Pr
es
Solve IS and LM for the value of interest:

= 1,500 + 25i
690
= 45i
ve
rs
i
ty
2,190 20i
= 15.333
fa
iU
Interest
ni
Th
e
Ic
Income Y
= 15.3%
= 2,190 20i
= 2,190 (20 15.3) = 2,190 306 = 1,884.
20
04
255. (a) First derive the IS Curve:
Y =C+I+G+EM
= 15 + 0.80Yd + 450 12i + 300 + 225 5 + 0.2Y
= 15 + 0.80 [Y 0.25Y] + 450 12i + 300 + 225 [5 + 0.2Y]
= 985 + 0.4Y 12i
Y = 1,642 20iIS Curve
LM Curve:
Demand for money = Mt + Ma
= 0.20Y + 145 60i
258
Part II
Supply of money
= 300
d
At equilibrium (M ) = Ms
300
= 0.20Y + 145 60i
.20Y
= 155 + 60i
= 775 + 300iLM Curve
Equilibrium income:
LM
775 + 300i
867
320i
2.71
04
20
04
1,642 20i =
04
IS
= 1,587.8 = 1,588.
M
AC
= 1,642 (20 2.71)
ef
.N
o.
Apply the value of i in IS Curve equation:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
256. (d) Equilibrium Trade Balance = Exports Imports = 225 5 + 0.2Y

Y =C+I+G+EM
= 15 + 0.80Yd + 450 12i + 300 + 225 5 + 0.2Y
= 15 + 0.80 [Y 0.25Y] + 450 12i + 300 + 225 [5 + 0.2Y] = 985 + 0.4Y 12i
Y = 1,642 20i..IS Curve
LM Curve:
= 0.20Y + 145 60i
Supply of money
= 300
At equilibrium (Md) = Ms
300
= 0.20Y + 145 60i
0.20Y
= 155 + 60i
Y
= 775 + 300i...LM Curve
Equilibrium income:
IS
= LM
1,642 20i = 775 + 300i
867
= 320i
i
= 2.71
Apply the value of i in IS Curve equation:
Y
Y
= 1,642 (20 2.71)

= 1,587.8 = 1,588
Equilibrium Trade Balance = 225 5 0.2Y = 225 5 (0.2 1,588) = 97.6.

257. (b) S =
50 + 0.25Y (1)
I
=
65 220i. (2)
Under equilibrium condition (1) = (2)
65 220i = 50 + 0.25Y
0.25Y
= 115 220i
Y
= 460 880i
i
= 0.10
259
Macroeconomics
20
04
M
AC
s.
Al
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
260.
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
259.
04
20
04
04
258.
Y
= 460 88 = 372.
t
(e) M + Ma
= Money supply
0.15Y + 75 225i = 500
0.15Y
= 425 + 225i
Y
= 2833.3 + 1500iLM Curve
IS Curve:
0.25 Y
= 115 220i
Y
= 460 880i..IS Curve
In an equilibrium situation: IS = LM
460 880i
= 2833.3 + 1500i
2373.3
= 2380i
i
= 0.997.
(a) IS Curve equation:
0.25Y
= 115 220i
Y
= 460 880i....IS Curve
The equation for the LM Curve is:
Mt + Ma
= Money supply
0.15Y + 75 225i = 500
0.15Y
= 425 + 225i
Y
= 2833.3 + 1500i.LM Curve
In an equilibrium situation: IS = LM
460 880i = 2833.3 + 1500i
2373.3
= 2380i
i
= 0.997
Equilibrium income:
Y = 2,833.3 + 1,500(0.997)
Y = 4,328.8 = 4,328.
(c) The equations can be re-written as:
0.5Y = 500 6i
0.5Y = 400 + 14i
Since IS Curve has a negative slope and LM Curve has a positive slope,
0.5Y = 500 6i..IS Curve
0.5Y = 400 + 14iLM Curve
At equilibrium, IS = LM
0.5Y 500 + 6i = 0.5Y 400 14i
20i = 100
i = 5.
(d) Since the full employment exists at the real income level of 550, we can substitute the real
income in the IS equation. The IS equation will become:
Y = 500 = 850 2500i
2500i
= 850 550 = 300
261.
300
= 0.12
2500
Substitute the value of Y and i in the LM equation:

550 = 500 5m + (1000 x 0.12)
1050 = 5m = 120
260
Part II
5m
= 930
i.e. m
930
= 186
5
Since the real money supply is 186, and the nominal money supply is 200, the price level to
200
achieve simultaneous equilibrium in the commodity and money market will be:
= 1.075.
186
262. (c) Saving function = 50 + 0.2Yd
Consumption function = 50 + 0.8Yd
= 1625 25iIS Curve
= 650 10i
0.40Y
04
20
= 50 + 0.8(Y0.25Y) + 200 10i + 400 = 650 + 0.8Y 0.2Y 10i
04
=C+I+G
04
M
AC
LM Curve:
= 250
ef
.N
Supply of money
o.
Demand for money = Mt + Ma = 0.25Y + 125 50i
In equilibrium; Md = Ms
27
-4
0.25Y + 125 50i = 250

= 250 125 + 50i
= 500 + 200i.LM Curve
31
4-
02
0.25Y
= 225i
ed
re
se
rv
1125
=5
225
= 1625 (25 5)
= 1,500.
ht
BN
= 500 + 200i
1125
.IS
1625 25i
:8
1-
When the money market and goods market are in equilibrium: IS = LM
= 50 + 0.2Yd
lr
ig
263. (a) Saving function
= C+I+G
Pr
es
s.
Al
ve
rs
i
ty
= 50 + 0.8(Y 0.25Y) + 200 10i + 400 = 650 + 0.8Y 0.2Y 10i

0.40Y = 650 10i
= 1,625 25iIS Curve
iU
ni
Ic
fa
LM Curve:
20
04
Th
e
Demand for money = Mt + Ma = 0.25Y + 125 50i

Supply of money
= 250
d
In equilibrium; M = Ms = 0.25Y + 125 50i = 250

0.25Y
= 250 125 + 50i
= 500 + 200i.LM Curve

1625 25i = 500 + 200i
1125
= 225i
1125
=5
225
Investment = 200 10i = 200 (10 5) = 150.

261
Macroeconomics
When the government expenditure increases by 135, the IS Curve will change to:
Y
= 50 + 0.8(Y 0.25Y) + 200 10i + (400 + 135)

= 50 + 0.8Y 0.2Y + 200 10i + 535
0.4Y = 785 10i

Y
= 1,962.5 25i.

1962.5 25i
= 500 + 200i
1462.5
= 225i
20
04
04
1462.5
= 6.5
225
04
Investment (I) = 200 (10 x 6.5) = 135
= 50 + 0.2Yd
M
AC
264. (e) Saving function
Crowding output of private investment = 150 135 = 15.
ef
.N
o.

=C+I+G
-4
= 50 + 0.8(Y 0.25Y) + 200 10i + 400
02
27
= 650 + 0.8Y 0.2Y 10i
31
= 1625 25iIS Curve
1-
4-
0.40Y = 650 10i
:8
LM Curve:
= 250
Md = Ms
re
In equilibrium;
se
rv
Supply of money
ed
= 0.25Y + 125 50i
.IS
BN
ig
ht
= 0.25Y + 125 50i = 250

= 250 125 + 50i
= 500 + 200i..LM Curve
Pr
es
s.
Al
lr
0.25Y
ty
= 500 + 200i
ve
rs
i
1625 25i
= 225i
fa
Ic
iU
ni
1125
1125
=5
225
20
04
Th
e
Investment = 200 10i = 200 (10 5) = 150.
Investment will not be crowded out if interest rate is maintained at 5%. This can happen only
when LM also shifts to the right.
IS Curve after increase in Government expenditure is:

Y
= 50 + 0.8(Y 0.25Y) + 200 10i + (400 + 135)

= 50 + 0.8Y 0.2Y + 200 10i + 535
0.4Y
= 785 10i
= 1,962.5 25i
Substituting i = 5% in the above equation:

Y
= 1,962.5 (25 5) = 1,837.5
Substituting the Y and i in the demand for money function:

262
Part II
Md(Mt + Ma) = 0.25 Y +125 50i

= (0.25 1837.5) +125 (50 5) = 459.38 + 125 250
Md
= 334.38.
Since money supply should cover demand for money, money supply should be increased
to 334.38.
So increase in Money supply = 334.38 250 = 84.38.
265. (d) IS Curve:
Y = C+I+G+EM
04
20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y
04
= 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y
04
20
= 1,170 + 0.5Y 15i
= 0.5Y = 1,170 15i.is Curve
M
AC
Y = 2,340 30i
o.
LM Curve:
ef
.N
Demand for money (Md) = Ms
-4
= 250 125 + 50i
27
0.25Y
0.25Y + 125 50i = 250
4-
=250
31
0.25Y + 125 50i
02
Supply of money (Ms) in equilibrium: Md = Ms
:8
BN
1-
0.25Y = 250 125 + 50i
.IS
Equilibrium Income
= 500 + 200i
1,840
= 230i
ht
re
2,340 30i
se
rv
ed
s.
Al
lr
ig
1,840
= 8%.
230
Pr
es
266. (e) IS Curve:
ty
Y =C+I+G+EM
ve
rs
i
= 20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y
iU
ni
= 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y
fa
= 1,170 + 0.5Y 15i
Th
e
Ic
= 0.5Y = 1,170 15i.is Curve
20
04
Y = 2,340 30i
LM Curve
0.25Y + 125 50i = 250
0.25Y
= 250 125 + 50i

0.25Y + 125 50i = 250
0.25Y
= 250 125 +50i
Equilibrium Income:
263
Macroeconomics
At equilibrium: IS = LM
2,340 30i = 500 + 200i
1,840
= 230i
1,840
= 8%
230
Apply the value of interest in IS Curve equation.

Y
= 2340 (30 x 8) = 2,100.
04
04
267. (b) Equilibrium Trade Balance

= E M = 260 10 + 0.1Y
20
IS Curve:
04
Y =C+I+G+EM
M
AC
= 20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y

= 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y
ef
.N
o.
= 1,170 + 0.5Y 15i
= 0.5Y = 1,170 15i.is Curve
27
-4
Y = 2,340 30i
02
LM Curve:
31
4-
:8
= 250 125 + 50i
BN
0.25Y
1-
0.25Y + 125 50i = 250
ed
= 250
se
rv
0.25Y + 125 50i
.IS
re
0.25Y = 250 125 +50i
ht
Y = 500 + 200i..LM Curve
s.
Al
lr
ig
Equilibrium Income:
Pr
es
2,340 30i = 500 + 200i

= 230i
ve
rs
i
ty
1,840
iU
ni
1,840
= 8%
230
Ic
fa
Apply the value of interest in IS Curve equation.

= 2340 (30 8) = 2,100
EM
= 260 [10 + (0.1 2,100)] = 260 220 = 40.
20
04
Th
e
268. (d) IS Curve
=C+I+G+EM
When the exogenous government expenditure increases by 115 the IS Curve will change to:
Y
= 20 + 0.75Yd + 500 15i + (400 + 115) + 260 10 + 0.1Y

= 20 + 0.75(Y 0.2Y) + 500 15i + 515 + 260 10 0.1Y
= 1,285 + 0.5Y 15i
= 2570 30i.IS Curve

264
Part II
0.25Y + 125 50i = 250

0.25Y
= 250 125 +50i

0.25Y + 125 50i = 250
0.25Y
Y
= 250 125 +50i

= 500 + 200i
230i
= 2,070
04
20
04
2,570 30i
04
At equilibrium:
M
AC
2070
= 9%
230
o.
Thus, an increase in Govt. expenditure will increase the equilibrium rate of interest to 9%.
ef
.N
The equilibrium Investment will be
02
27
-4
= 500 (15 9) = 500 135 = 365.

269. (a) To retain the same level of investment after the increase in govt. expenditure, the interest
rate should be maintained in the same rate and money supply should be increased.
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
IS Curve
Y =
C+I+G+EM
When the exogenous government expenditure increases by 115 the IS Curve will change to:
Y =
20 + 0.75Yd +500 15i + (400 + 115) + 260 10 + 0.1Y
=
20 + 0.75(Y 0.2Y) + 500 15i + 515 + 260 10 0.1Y
=
1,285 + 0.5Y 15i
=
2570 30iIS Curve
The new IS Curve will be:
Y =
2,570 30i
ty
Pr
es
s.
Al
=
2,570 (30 8) = 2,330
In the money market, the demand for money will be
= 0.25Y + 125 50i
Ic
fa
iU
ni
ve
rs
i
= (0.25 2,330) + 125 (50 8)

= 582.5 + 125 400 = 307.5
The money supply should be increased from 250 to 307.5.
Th
e
270. (c) The IS Curve:
20
04
=C+I+G
= 80 + 0.75Yd + 300 200i + 30
= 80 + 0.75(Y 30) + 300 200i +30

0.25 Y = 387.5 200i
Y
= 1550 800iIS Curve
LM Curve:
Ms
= Mt + Ma
270
= 0.30Y + 150 300i
0.30Y = 270 150 + 300i

0.30Y = 120 + 300i
265
Macroeconomics
= 400 + 1000i
Equating IS and LM:

1550 800i
= 400 + 1000i
1800i
= 1150
1150
1800
Investment (I) = 300 200i
04
1150
= 300 128 = 172.
1800
04
= 300 200
= 334 + 0.75Y 18 200i
04
= 60 + 0.75 (Y 24) + 250 200i + 24
M
AC
20
271. (d) IS Curve:
0.25Y = 316 200i
o.
= 1264 + 800i
ef
.N
LM Curve:
-4
= 0.25Y + 134 500i
02
= 446 + 2000i
4-
27
0.25Y = 116 + 500i
1-
31
At equilibrium:
BN
800
= 0.285 = 0.29
2800
= 250 200 x (0.29) = 192.
se
rv
Investment
.IS
ed
:8
1,264 800i = 464 + 2000i
re
272. (d) IS Curve:
= 60 + 0.75(Y 24) + 250 200i +24
= 334 + 0.75Y 18 200i
Pr
es
0.25Y = 316 200i
= 1264 + 800i
ve
rs
i
LM Curve:
ty
= 0.25Y + 134 500i
= 66 + 500i
Ic
fa
iU
0.25Y
ni
200
Y
s.
Al
lr
ig
ht
= 264 + 2000i
1264 800i
2800i
20
04
Th
e
At equilibrium:
= 264 + 2000i
= 1000
= 1000/2800 = 0.36
The equilibrium income is:

Y
= 1264 + 800i
= 1264 + [800 x (0.36)] = 1552.
273. (b) Quantity of money available for speculative balance:
= Money Supply Transaction Demand for Money at Income Level of 700.

Transaction demand for money = 700 0.20 = 140.
Money available for speculative balances = 250 140 = 110
266
Part II
So at the income level of 700 the money available for speculative balance is 110.
274. (a) Quantity of money available for speculative balance:
= Money Supply Transaction Demand for Money at Income Level of 700

Transaction demand for money = 900 0.25 = 225
Money available for speculative balances = 250 225 = 25
So at the income level of 900 the money available for speculative balance is 25.
650
= 850 2500i
04
= 850 2500i
20
04
275. (a) Since full employment exists at 650 real income level, we can substitute the real income
in the IS equation.
= 200/2500 = 0.08.
04
2500i = 200
= 500 + 5m + 1000i
ef
.N
o.
M
AC
We can now substitute Y = 650 and i = 0.08 in the LM equation which will determine
whether simultaneous equilibrium is there in the market.
650 = 500 + 5m + (1000 0.8)
27
-4
650 = 500 + 5m + 80
4-
= 1070/5 = 214
31
02
5m = 1070
(S) = 720 + 0.3Yd
.IS
276. (d) Savings function
BN
:8
1-
Since the nominal money supply is 200 while the real money supply is 214, all markets will
be in equilibrium when the price level is 200/214 = 0.934.
se
rv
ed
Consumption function (C) = 720 + 0.7Yd

Y = C + I +G + E X
ht
re
= 720 + 0.7Yd + 20 + 0.10Y + 200 + 25 0.05Y
lr
ig
= 720 + 0.7(Y 0.2Y + 50) + 20 + 0.10Y + 200 + 25 0.05Y
Pr
es
= 1000 + 0.61Y
s.
Al
= 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y
ty
0.39Y = 1000 IS Curve

= 2564.10
ve
rs
i
Th
e
Ic
fa
iU
ni
Note that consumption function is given as interest inelastic. So IS Curve will be a horizontal
line in the r-Y plane. This means equilibrium output will be determined solely in the goods
market and the position of LM Curve does not matter for the determination of equilibrium
output.
20
04
Hence, equilibrium level of income = 2564.10.
277. (b) Trade Balance
= Exports Imports. = 25 0.05Y
Y = equilibrium income
Savings function
(S) = 720 + 0.3Yd

Y
C + I +G + E X
720 + 0.7Yd + 20 + 0.10Y + 200 + 25 0.05Y
720 + 0.7(Y 0.2Y + 50) + 20 + 0.10Y + 200 + 25 0.05Y
720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y = 1000 + 0.61Y
0.39Y =
1000 IS Curve
267
Macroeconomics
2564.10
Trade Balance = 25 (2564.10 0.05) = 103.205.

278. (e) Budget surplus
= T (G
+ R
= 0.2Y (200 + 50)

Y
= C + I +G + E X
= 720 + 0.7Yd + 20 + 0.10Y + 200 + 25 0.05Y
= 720 + 0.7(Y 0.2Y + 50) + 20 + 0.10Y + 200 + 25 0.05Y
04
= 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y = 1000 + 0.61Y
20
= 2564.10
04
04
0.39Y = 1000 IS Curve
Budget surplus = (0.2 2564.10) (200 + 50)
M
AC
= 512.82 250 = 262.82.

279. (a) Given the saving function (S)
ef
.N
o.
= 420 + 0.2Yd + 6i
Consumption function (C) = 420 + 0.8Yd 6i
-4
27
= C + I + G + (E M)
31
4-
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
02
Thus the IS Curve will be:
1-
= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y
BN
:8
= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y
.IS
= 3900 + 0.74Y 26i
ed
0.26Y= 3900 26i

= (3900/0.26) (26i/0.26)
= 15000 100i IS Curve
re
se
rv
ig
Pr
es
0.15Y = 450 + 225i
lr
= 0.15Y 225i
s.
Al
450
ht
LM Curve equation:
= (450/0.15) + (225i/0.15)
= 3000 + 1500i . LM Curve
ve
rs
i
ty
iU
ni
Economy will be in equilibrium position when goods market and Money market are in
simultaneous equilibrium.
Ic
fa
Thus at equilibrium: IS = LM
20
04
Th
e
15000 100i = 3000 + 1500i

1600i
= 12000
= 12000/1600 = 7.5
Substituting the value of i in IS Curve:

Y
= 15000 (100 7.5) = 14,250
Consumption at equilibrium =420 + 0.8Yd 6i

= 420 + 0.8[14250 (0.2 14250) + 100 )] (6 7.5)
= 420 + 0.80(14250 2850 + 100) (6 7.5)
= 420 + 9200 45
= 9575.
280. (d) Private investment at equilibrium = 0.2Y 20i
268
Part II
Consumption function (C) = 420 + 0.8Yd 6i

Thus the IS Curve will be:
Y
= C + I + G + (E M)
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y
= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y
= 3900 + 0.74Y 26i
= 3900 26i
= (3900/0.26) (26i/0.26)
= 15000 100iIS Curve
04
04
20
0.26Y
04
LM Curve equation:
= (450/0.15) + (225i/0.15)
= 3000 + 1500iLM Curve
o.
M
AC
= 450 + 225i
ef
.N
0.15Y
451 = 0.15Y 225i
-4
= 3000 + 1500i
1600i
= 12000
= 12000/1600 = 7.5
1-
31
4-
02
27
15000 100i
:8
Substituting the value of i in IS Curve:
.IS
BN
= 15000 (100 7.5) = 14,250
ed
Private investment at equilibrium
se
rv
= (0.2 14,250) (20 7.5) = 2850 150 = 2700.
ht
= C + I + G + (E M)
ig
re
281. (b) Demand for money = 0.15Y ( 225i)
s.
Al
lr
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
Pr
es
= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y
ty
= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y
ve
rs
i
= 3900 + 0.74Y 26i
20
04
fa
Th
e
= (3900/0.26) (26i/0.26)
Ic
iU
ni
0.26Y= 3900 26i
LM Curve equation:
452 = 0.15Y 225i
0.15Y= 450 + 225i
Y
= (450/0.15) + (225i/0.15)
= 3000 + 1500i.LM Curve
15000 100i
= 3000 + 1500i
1600i
= 12000
= 12000/1600 = 7.5
269
Macroeconomics
Substituting the value of i in IS Curve,

= 15000 (100 7.5) = 14,250
Demand for money = (0.15 14250) (225 7.5)

= 2137.5 1687.5 = 450.
282. (e) Trade balance at equilibrium
= Exports Imports = 1400 0.1Y
= C + I + G + (E M)
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
04
04
= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y
20
= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y
04
= 3900 + 0.74Y 26i
o.
= (3900/0.26) (26i/0.26)
ef
.N
M
AC
0.26Y= 3900 26i
LM Curve equation:
-4
453 = 0.15Y 225i
= 3000 + 1500i.LM Curve
31
= (450/0.15) + (225i/0.15)
1-
4-
02
27
0.15Y= 450 + 225i
:8
= 12000
= 12000/1600 = 7.5
se
rv
1600i
ed
.IS
BN
15000 100i = 3000 + 1500i
re
Substituting the value of i in IS Curve,

= 15000 (100 7.5) = 14,250
ig
ht
s.
Al
lr
Trade Balance at equilibrium: = 1400 (0.1 x 14250) = 25.
Pr
es
283. (c) Given the saving function (S) = 20 + 0.25Yd
= 20 + 0.75Yd
ty
ve
rs
i
Thus the IS curve will be:

= C + I + G + ( E M)
= 20 + .75[Y (40 + 0.2Y)] + 240 10i + 300 +200 10 0.10Y
fa
iU
ni
20
04
Th
e
Ic
= 20 + 0.75 (Y + 40 0.2Y) + 240 10i + 300 + 200 10 0.10Y
= 20 + 0.75Y + 30 0.15Y + 240 10i + 300 + 200 10 0.10Y

= 780 + 0.5 10i
0.5Y = 780 10i..IS curve

The money market will be in equilibrium when, supply of money (Ms) is equal to
Transaction demand for money + speculation demand for money.
250 = 0.2Y + 50 16i
0.2Y = 200 + 16i...LM curve
Y
= 1000 + 80i
When equilibrium is there, IS = LM

1560 20i
270
= 1000 + 80i
Part II
1560 1000
560
i
= 80i + 20i
= 100i
= 5.6
= 1560 (20 5.6) = 1560 112 = 1448.
300 + 0 [40 + (0.2 x Y)]
C + I + G + ( E M)
20 + .75[ Y (40 + 0.2Y)] + 240 10i + 300 + 200 10 0.10Y
20 + 0.75(Y + 40 0.2Y) + 240 10i + 300 + 200 10 0.10Y
20 + 0.75Y + 30 0.15Y + 240 10i + 300 + 200 10 0.10Y
780 + 0.5 10i
04
B
W
780 10i..IS Curve
o.
0.5Y =
M
AC
04
Govt. expenditure + Transfer payments taxes
20
04
284. (b) Budget deficit at equilibrium
ef
.N
The money market will be in equilibrium when, supply of money (Ms) is equal to
Transaction demand for money + speculation demand for money.
-4
250 = 0.2Y + 50 16i
02
431
1:8
BN
.IS
ed
se
rv
Y = 1000 + 80i
When equilibrium is there: IS = LM
1560 20i
= 1000 + 80i
1560 1000 = 80i + 20i
560
= 100i
i
= 5.6
27
0.2Y = 200 + 16i....LM Curve
ig
ht
re
Y = 1560 (20 5.6) = 1560 112 = 1448

Budget deficit at equilibrium
Pr
es
s.
Al
lr
= 300 + 0 [40 + (0.2 1448)]

= 300 + 40 289.6 = 50.4.
= C + I + G + (E M)
ty
285. (a) Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
= 20 + 0.75[Y (40 + 0.2Y)] + 240 10i + 350 + 200 10 0.10Y

= 20 + 0.75(Y + 40 0.2Y) + 240 10i + 350 + 200 10 0.10Y
= 20 + 0.75Y + 30 0.15Y + 240 10i + 350 +200 10 0.10Y
Y = 830 + 0.5 10i
0.5Y = 830 10i..IS Curve
Y = 1,660 20i
250 = 0.2Y + 50 16i
0.2Y
= 200 + 16i..LM Curve
Y
= 1000 + 80i
Solve the IS and LM Curve:
1,660 20i = 1000 + 80i
i
= 6.6%
Apply the value of i into IS Curve:
Y
= 1660 (20 6.6) = 1660 132 = 1,528.
271
Macroeconomics
286. (c) Given saving function is = 60 + 0.25Yd

= 60 + 0.75Yd
The IS Curve is:
= C + I + G + ( E M)
20
04
04
= 60 + 0.75 (Y 0.2Y + 80) +1000 15i + 800 + 400 20 0.10Y

Y = 2300 + 0.50Y 15i
0.5Y = 2300 15i
Y = 4600 30i
Equilibrium in the money market will be
Supply of money = Demand for money
04
450 = 0.2Y + 130 44i
0.2Y= 130 44i 450

= 1600 + 220i..LM Curve
o.
M
AC
0.2Y = 320 + 44i
= 1600 + 220i
-4
= 4600 30i
27
ef
.N
Equilibrium income in economy:
4-
02
250i = 3000
ed
.IS
BN
:8
1-
31
i
= 12
Equilibrium interest is 12%.
To find out equilibrium income substitute the value of i in IS Curve equation.
Y = 4600 30i
s
ht
= C + I + G + ( E M)
re
se
rv
Y = 4600 30 12 = 4240.
287. (e) Trade balance = Exports Imports = 400 20 + 0.1Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
= 60 + 0.75 (Y 0.2Y + 80) + 1000 15i + 800 + 400 20 0.10Y

Y = 2300 + 0.50Y 15i
0.5Y = 2300 15i
Y = 4600 30i
Equilibrium in the money market will be:
Supply of money = demand for money
450 = 0.2Y + 130 44i
0.2Y= 130 44i 450
0.2Y = 320 + 44i
Y = 1600 + 220i..LM Curve
Y = 4600 30i
Y = 1600 220i
250i = 3000 = i = 12
Y = 4600 30i
Y
= 4600 30 12 = 4240
Trade Balance = 400 (20 + 0.1 4240) = 400 444 = 44.

272
Part II
04
20
04
31
4-
02
27
-4
ef
.N
o.
M
AC
=
Govt. expenditure + Transfer payments Taxes = (800 + 80) (0.2 Y)
Y =
60 + .75 (Y 0.2Y + 80) +1000 15i + 800 + 400 20 0.10Y
Y =
2300 + 0.50Y 15i
0.5Y =
2300 15i
Y =
4600 30i
Supply of money = demand for money
450 = 0.2Y + 130 44i 0.2Y = 130 44i 450
0.2Y = 320 + 44i
Y = 1600 + 220i..LM Curve
Equilibrium rate of interest in economy:
Y = 4600 30i
Y = 1600 220i
250i = 3000 = i = 12
Y = 4600 30i
Y = 4600 30 12 = 4240
04
288. (b) Budget Deficit
:8
1-
Budget deficit = (800 + 80) (0.2 4240) = 880 848 = 32.
BN
289. (c) Y = C + I + G + E M
= 2425 + 0.50Y 15i
se
rv
ed
.IS
= 60 + .75 (Y 0.2Y + 80) +1000 15i + 925 + 400 20 0.10Y
= 4850 30i
ht
re
0.5Y = 2425 15i
lr
ig
s.
Al
Supply of money = Demand for money
Pr
es
450 = 0.2Y + 130 44i
ve
rs
i
ty
0.2 Y= 130 44i 450

0.2Y = 320 + 44i
= 1600 + 220i..LM Curve
iU
ni
20
04
Th
e
Ic
fa

Y
= 4850 30i
= 1600 220i
250i = 3250
i
= 13

Y
= 4850 30i
= 4850 30 13 = 4460.
290. (a) Given saving function is = 25 + 0.25Yd
Consumption function is = 25 + 0.75Yd

Y
= C+I+G+EM
273
Macroeconomics
= 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y)

= 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y
= 1170 + 0.5Y 15i
0.5Y = 1170 15i
Y
= 2340 30i....IS Curve
Ms
P
250
= 0.25Y + 125 50i
Mt
Ma
+
P
P
04
= 500 + 200i ...LM Curve
20
04
0.25Y = 125 + 50i
B
M
AC
2340 30i = 500 + 200i

230i
= 1840
o.
= 8%
ef
.N
Equilibrium income is:
= 2340 30i
-4
4-
02
27
= 2340 (30 8) = 2100.

291. (d) Trade Balance = Exports Imports
1-
31
= 225 10 + 0.1Y
=C+I+G+EM
:8
04
By equalizing the LM and IS Curves, we will get the equilibrium interest rate.
BN
= 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y)
ed
.IS
= 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y = 1170 + 0.5Y 15i

= 2340 30iIS Curve
re
se
rv
0.5Y = 1170 15i
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
Money supply = Transaction Demand for Money + Speculative demand for money
250 = 0.25Y + 125 50i
0.25Y = 125 + 50i
Y
= 500 + 200i .LM Curve
2340 30i = 500 + 200i
230i
= 1840
i
= 8%
Y = 2340 30i
= 2340 (30 x 8) = 2100
Trade Balance = Exports Imports = 225 10 + (0.1 2100) = 215 210 = 5.

292. (e) Budget Deficit
=
(Govt. expenditure + Transfer Payments) Taxes
=
400 + 40 0.2Y
Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y)
= 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y = 1170 + 0.5Y 15i
0.5Y = 1170 15i
Y
Money supply = Transaction demand for Money + Speculative demand for money
274
Part II
250
= 0.25Y + 125 50i
0.25Y = 125 + 50i

Y
= 500 + 200i ..LM Curve
2340 30i
= 500 + 200i
230i
= 1840
= 8%
04
04
= 2340 30i = 2340 (30 8) = 2100
20
Budget Deficit = 400 + 40 0.2Y = 440 (2100 0.2) = 20.
04
293. (c) Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 745 + 225 (10 + 0.1Y)
M
AC
= 25 + 0.6Y + 30 + 500 15i + 745 + 225 10 0.1Y

= 1170 + 0.5Y 15i
ef
.N
o.
0.5Y = 1515 15i
-4
Money supply = Transaction Demand for Money + Speculative demand for money
02
27
250 = 0.25Y + 125 50i
31
1-
= 500 + 200i ..LM Curve
:8
4-
0.25Y= 125 + 50i
BN
= 11%
re
ed
= 2530
se
rv
230i
.IS
3030 30i = 500 + 200i
ht
= 3030 30i = 3030 (30 11) = 2700.
lr
ig
s.
Al
294. (a) Consumption function = 60 + 0.8Yd
=C+I+G+EM
Pr
es
ty
= 60 + 0.8 [Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
ve
rs
i
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 400 + 250 20 0.1Y
iU
ni
= 980 + 0.72Y 35i
20
04
Th
e
Ic
fa
0.28Y= 980 35i ...IS

= 3500 125i
Equilibrium in the money market:

Ms = Md
300 = 0.2Y + 120 40i
0.2y = 180 + 40i.LM
Y
= 900 + 200i
Economy will be in equilibrium when IS = LM:

3500 125i = 900 + 200i
2600 = 325i
i
= 8%

275
Macroeconomics
= 3500 125i = 3500 1000 = 2500.
295. (e) Trade Balance = Exports Imports
= 250 20 + 0.1Y
Y = 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 400 + 250 20 0.1Y = 980 + 0.72Y 35i
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
0.28Y= 980 35i ..IS

Y = 3500 125i
The LM Curve equation:
Ms = Md
300 = 0.2Y + 120 40i
0.2y = 180 + 40iLM
Y = 900 + 200i
3500 125i
= 900 + 200i
2600
= 325i
i
= 8%
Y = 3500 125i = 3500 1000 = 2500
:8
1-
Trade Balance = 250 20 + 0.1 2500 = 230 250 = 20.
BN
296. (d) Budget Surplus = T (G + R) = 0.1Y (400 + 50)
= 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
ed
.IS
= 980 + 0.72Y 35i
ig
= 3500 125i
Pr
es
Ms = Md
s.
Al
The LM Curve Equation;
lr
ht
0.28Y = 980 35i ..IS
re
se
rv
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i+ 400 + 250 20 0.1Y
ve
rs
i
ty
302 = 0.2Y + 120 40i
0.2y = 180 + 40i.LM

= 900 + 200i
iU
ni
Ic
fa
20
04
Th
e
3500 125i = 900 + 200i

2600 = 325i
i
= 8%

Y
= 3500 125i = 3500 1000 = 2500
Budget Surplus = 0.1Y (400 + 50) = (0.1 2500) 450 = 250 450 = 200.
297. (b) Y
= 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 582 + 250 [20 + 0.1Y]
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 582 + 250 20 0.1Y
= 1162 + 0.72Y 35i
0.28Y
= 1162 35i ...IS
Y = 4150 125i
276
Part II
The LM Curve equation:

Ms = Md
303 = 0.2Y + 120 40i
0.2y = 180 + 40i.LM
Y
= 900 + 200i

4150 125i = 900 + 200i
3250
= 325i
20
04
04
i
= 10%
04
= 4150 125 10 = 4150 1250 = 2900.
298. (a) IS Curve:
= 400 + 0.8Yd 20i

= Y + R + T = Y + 200 0.1Y = 0.9Y + 200
= 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i
ef
.N
o.
M
AC
C
Yd
27
-4
Equilibrium Income:
Y =C+I+G+EM
4-
02
= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y
1:8
= 7460 320i.IS Curve
BN
31
Y = 1865 + .75Y 80i

0.25Y= 1865 80i
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
400 = 0.25Y + 110 145i
= 1160 + 580i...LM Curve
ht
lr
ig
We can find out the equilibrium interest by equating the IS and LM:
= 1160 + 580i
6300
= 900i
= 7%
ty
Pr
es
s.
Al
7460 320i
= 7460 320i = 7460 (320 7) = 5220.
ve
rs
i
= 800 15 + 0.12Y
Ic
fa
iU
ni
299. (b) Trade Balance = Export Imports
= 400 + 0.8Yd 20i
Yd
=Y+R+T
= Y + 200 0.1Y = 0.9Y + 200
20
04
Th
e
IS Curve:
= 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i
Equilibrium Income:
Y
=C+I+G+EM
= 560 + 0.72Y 20i + 20 +0.15Y 60i + 500 + 800 15 0.12y
= 1865 + 0.75Y 80i
0.25Y = 1865 80i

Y
= 7460 320iIS Curve

277
Macroeconomics
LM Curve:
Md = Mt + Ma
400 = 0.25Y + 110 145i
Y
= 1160 + 580iLM Curve

= 1160 + 580i
6300
= 900i
= 7%
= 7460 320i
04
7460 320i
04
04
20
= 7460 (320 7) = 5220
Trade Balance = Export Imports
M
AC
= 800 (15 + 0.12 5220)

Trade Balance = 158.60.
o.
= T (G + R)
ef
.N
300. (d) Budget Deficit
-4
=C+I+G+EM
27
= 0.1Y (500 + 200)
4-
= 1865 + 0.75Y 80i
31
02
= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y
:8
BN
1-
0.25Y= 1865 80i
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
400 = 0.25Y + 110 145i
= 1160 + 580i...LM Curve
ht
lr
ig
s.
Al
7460 320i = 1160 + 580i

= 900i
= 7%
= 7460 320i
ve
rs
i
ty
Pr
es
6300
iU
ni
= 7460 (320 x 7) = 5220
fa
Budget Deficit = (0.1 5220) (500 + 200) = 522 700 = 178.
Th
e
Ic
301. (c) IS Curve:

d
= 400 + 0.8Yd 20i

=Y+R+T
= Y + 200 0.1Y
20
04
= 0.9Y + 200
C
= 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i
Equilibrium Income:
Y
=C+I+G+EM
= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y
= 1865 + 0.75Y 80i
0.25Y = 1865 80i

278
Part II
LM Curve:
Md = Mt + Ma
400 = 0.25Y + 110 145i
Y
= 1160 + 580i.LM Curve
7460 320i = 1160 + 580i
= 900i
= 7%
= 7460 320i
20
04
04
6300
04
= 7460 (320 7) = 5220
= 8360 320i
W
M
AC
= (1875 + 225) 80i
ef
.N
o.
0.27Y
If government expenditure increases by 225, the new IS function is:
There will not be any change in LM Curve
7200
= 900i
= 8%
= 8360 320i
27
= 1160 + 580i
:8
1-
31
4-
02
8360 320i
-4
.IS
ed
Private Investment (I)= 20 + 0.15Y 60i
BN
= 8360 (320 8) = 5800
se
rv
Original investment = 20 + [0.15 5220] (60 7) = 383
re
Investment after increase in G: 20 + [0.15 5800] (60 8) = 410
ig
ht
Change in Investment = 410 383 = 27.

= 502 + 0.80Yd
s.
Al
lr
302. (b) Savings (S)
Pr
es
Consumption (C) = 502 + 0.80Yd

Yd
=YT+R
ve
rs
i
ty
= Y 0.25Y + 60 = 0.75 + 60
iU
ni
= 502 + 0.80 [0.75Y + 60]

= 502 + 0.60Y + 48 = 550 + 0.60Y
Ic
fa
IS Curve:
20
04
Th
e
=C+I+G+EM
= 550 + 0.60Y + 400 + 0.25Y 10i + 300 + 150 0.10y = 1400 + 0.75 10i
=
(1400 10i )
0.25
= 5,600 40i
LM Curve:
Md = Mt + Ma
= 0.1Y 30i
Money Market to be in equilibrium, Md = Ms
0.15Y 30i = 480
Y
( 480 + 30i )
0.15
279
Macroeconomics
= 3200 + 200i
By equating IS and LM Curve:

5600 40i = 3200 + 200i
240i
= 2400
= 10%
= 5600 (40 10)
= 5200.
303. (e) Trade Balance = Export Import
04
04
= 150 0.10Y
20
= 502 + 0.80Yd
Savings (S)
Yd
04
Consumption (C) = 502 + 0.80Yd
M
AC
=YT+R
= Y 0.25Y + 60 = 0.75 + 60
o.
= 502 + 0.80 [0.75Y + 60]
ef
.N
= 502 + 0.60Y + 48 = 550 + 0.60Y
-4
27
=C+I+G+EM
02
IS Curve:
4-
= 550 + 0.60Y + 400 + 0.25Y 10i + 300 + 150 0.10y
0.25
1:8
(1400 10i )
= 5,600 40i
BN
.IS
31
= 1400 + 0.75 10i
ed
LM Curve:
se
rv
Md = Mt + Ma
re
= 0.1Y 30i
ig
ht
s.
Al
lr
0.15Y 30i = 480
( 480 + 30i )
= 3200 + 200i
Pr
es
ve
rs
i
ty
0.15
ni
fa
iU
5600 40i
i
= 10%
= 5600 (40 10)
= 5200
Ic
= 2400
Th
e
20
04
= 3200 + 200i
240i
Trade Balance = 150 0.10Y

= 150 (0.10 5200) = 370.

304. (a) Equilibrium rate of interest is determined where IS = LM
Y=C+I+G +EM
Y = 15 + 0.8 Yd + 450 12i + 300 + 225 5 0.20Y
Y = 15 + 0.8 (Y 0.25Y) + 450 12i + 300 + 225 5 0.20Y
Y = 985 + 0.40Y 12i
280
Part II
Y = 1641.67 20i (IS curve)

Total demand for money
= Mt + Ma = 0.20Y + 145 60i
Supply of Money = 300 MUC
0.20Y + 145 60i = 300
0.2Y = 155 + 60i
Y = 775 + 300i (LM curve)
Equilibrium rate of interest is determined where IS = LM
04
04
1,641.67 20i = 775 + 300i
20
320i = 866.67
M
AC
305. (a) Money market equilibrium is where demand for money = supply of money
04
i = 2.7%.
kY hi = M .
ef
.N
o.
kY = M + hi
Y = ( M + hi) / k.
27
-4
306. (d) 0.5Y = 3,125 25i
02
Y = 6,250 50i
.IS
BN
:8
1-
31
4-
If i decrease by one percentage point, equilibrium income would increase by 50 MUC.

307. (d) Crowding-out refers to decrease in private investment because of increase in interest rate
caused by the increase government spending. Crowding out = 100 5 = 500.
308. (a) LM function Y = 500 + 20i
ed
i = 10%, Y = 500 + (20 10) = 700
Y = 500 + (20 7) = 640
i = 5%,
Y = 500 + (20 5) = 600
i = 4%,
Y = 500 + (20 4) = 580
ht
re
se
rv
i = 7%,
ig
If,
ty
Pr
es
s.
Al
lr
i = 3%, Y = 500 + (20 3) = 560

Does not fall on the LM curve hence does not represent an equilibrium in the money market.
309. (c) There will not be any crowding out if i = 8%
ve
rs
i
This can happen only when IS function shifts to the left
fa
iU
ni
Substituting i = 8%, IS function becomes

Y = 2,900 100 (8) = 2,100
Ic
Total demand for money function = (Mt /p) + (Ms /p) = 0.50Y + 350 100i
20
04
Th
e
Substituting Y = 2,100 and I = 8% in the total demand for money function,

0.50 (2,100) + 350 100(8) = 1,050 + 350 800 = 600 MUC.
310. (c) At equilibrium, IS = LM
Y = 5700 + 0.5Y 100i

0.5Y = 5700 100i
Y = 11400 200i
.IS function
Y = 5200 + 800i
.LM function
Thus at simultaneous equilibrium,
11400 200i = 5200 + 800i
Or, 6200 = 1000i
Or, i = 6.2
281
Macroeconomics
When government spending increases by 100, the IS function becomes

0.5Y = (5700 + 100) 100i
0.5Y = 5800 100i
Or, Y = 11600 200i
Thus, at equilibrium,
5200 + 800i = 11600 200i
Or, 1000i = 6400
Or, i = 6.4.
04
311. (b) S = 250 + 0.30Yd
20
04
C = 250 + 0.70Yd
04
T = 0.25Yd
M = 0.3Y
o.
1
1
1
1
=
=
=
= 1.29
1 (1 t ) + 1 0.70 (1 0.25 ) + 0.3 1 0.70 ( 0.75 ) + 0.3
0.775
ef
.N
M
AC
The value of multiplier = m
-4
27
02
31
4-
100
= 77.5 MUC.
1.29
1-
Or, I =
Y = mI
Or, 100 = 1.29I
:8
312. (c) S = 300 + 0.20Y
BN
At Y = 2,250, S = 300 + 0.20 (2,250) = 300 + 450 = 150
ed
.IS
At equilibrium, S = I
se
rv
200 5i = 150
re
or, 5i = 50
ig
ht
or, i = 10%.
s.
Al
lr
313. (b) L = 0.4Y 10i
Pr
es
At equilibrium, demand for money

= Supply of money
ve
rs
i
ty
i.e. 0.4Y 100i = 300
ni
When, i = 8, 0.4Y 100(8) = 300
iU
Or, 0.4Y = 380
Ic
fa
Or, Y = 950
20
04
Th
e
When I = 6, 0.4Y100 (6) = 300
Or, 0.4Y = 360

Or, Y = 900
Change in the equilibrium level of output = 900 950 = 50 MUC.
314. (c) When i = 10, Investment, I = 200 10(10) = 100
Because of expansionary fiscal policy, i = 12,

Then investment I = 200 10(12) = 80
crowding out = 100 80 = 20 MUC.
315. (b) There will not be any crowding out if i = 10%
This can happen only when LM curve shifts to the right.

Substituting i = 10%, LM function become Y
282
Part II
= 500 + 200(10) = 2,500

Total demand for money function
M
= t
p
+ Ma

p

= 0.50Y + 250 100
Substituting Y = 2,500 and i = 10 in the total demand for money function, we get,
0.50 (2,500) + 250 100(10) = 1,250 + 350 1,000 = 600 MUC
Since money supply is equal to demand for money, the new money supply will be 600 MUC.
316. (e) Saving function = 50 + 0.50 Yd
04
04
Hence, consumption function = 50 + 0.50 Yd
20
Y=C+I+G+EM
Or, Y = 50 + 0.50Y 0.2Y + 40 +1,000 30i + 800 + 450 20 0.20Y
M
AC
Or, Y = 2,320 + 0.1Y 30i
o.
Or, 0.90Y = 2,320 30i
-4
M
M
= t + a
p
p
27
ef
.N
Or, Y = 2,577.78 33.33i..IS Curve

Ms
04
Or, Y = 50 + 0.50 (Y 0.40Y + 80) + 1,000 30i + 800 + 450 (20 + 0.20Y)
4-
02
or, 500 = 0.5Y + 250 100i
:8
or, Y = 500 + 200i .LM Curve
1-
31
or, 0.50Y = 250 + 100i
BN
By equating the IS and LM function, we can get the equilibrium rate of interest.
ed
.IS
500 + 200i = 2,577.78 33.33
se
rv
or, 233.33i = 2,077.78
ig
ht
Y = 2,577.78 33.33 (8.9)
re
or, i = 8.9%
s.
Al
lr
= 2,577.78 296.64 = 2,281.14 = 2,281MUC (approximately).
Pr
es
317. (c) Goods market equilibrium:
0.5Y = 2,925 37.5;
ve
rs
i
ty
or, Y = 5,850 75i (IS Function)
ni
Money market equilibrium:
iU
0.25Y = 312.5 + 125;
Ic
fa
or, Y = 1,250 + 500i (LM function)
20
04
Th
e
At simultaneous equilibrium of goods market and money market, IS = LM

5,850 75i = 1,250 + 500i
or, 575i = 4,600

or, i = 8%
Y = 5,850 75(8) = 5,850 600 = 5,250
Trade balance at equilibrium = E M
= 650 (25 + 0.25Y)
= 650 25 .25 (5,250)
= 650 25 1,312.50
= 687.50 MUC (deficit).
318. (e) If Government expenditure increase by 475 MUC,
283
Macroeconomics
IS function becomes
0.5Y = 2,925 + 475 37.5i
or, 0.5Y = 3,400 37.5i
or, Y = 6,800 75i
At simultaneous equilibrium,
IS = LM
Or, 6,800 75i = 1,250 + 500i
Or, 575i = 5,500
04
04
Or, i = 9.65%.
04
20
319. (d) LM Curve
= 0.25Y + 450 50i
300 + 50i
= 0.25Y
1,200 + 200
=Y
-4
= 0.25Y + 450 50i
31
4-
02
27
750
Money Supply = Money Demanded
:8
1-

= 1,200 + 200i
1,300
= 240i
= 5.42
= 1,200 + (200 5.42) = 2,284.
ig
lr
= 0.10Y + 88
Pr
es
s.
Al
= 176 2i
= 0.20Y 5i
ty
= 0.04Y 24
iU
ni
ve
rs
i
=M=L
= 0.20Y 120
fa
Ic
= 60 + 0.80Y + 116 2i
0.2Y
The LM equation
5i
ht
320. (d) The IS equation = Y = C + I
re
se
rv
ed
.IS
BN
2,500 40i
20
04
Th
e
The simultaneous equilibrium for IS and LM is;

0.10Y + 88
= 0.04Y 24
So, Y = 800 and i = 8%.
321. (a)
= 120 + 0.6Y + 150 80i
= 270 + 0.6Y 80i
Y 0.6Y = 270 80i

Y
= 675 200i .......(i)

300 = 0.3Y + 120 160i
Y = 600 + 533.33i ..... (ii)
284
ef
.N
o.
In equilibrium position:
M
AC
= Transaction demand for money + Speculative demand for money
Demand for Money (Md)
Part II
Putting the value of Y in equation (i), we have:

675 200i = 600 + 533.33i
733.33i
= 75
= 0.10%
75
733.33
Y = 675 200 0.10 = 655.
04
322. (b) The given equations can be rewritten as
04
0.6Y = 650 8i
04
20
0.6Y = 520 + 18i
M
AC
0.6Y = 650 8i IS Curve
Since IS Curve has a negative slope and LM Curve has a positive slope,
o.
0.6Y = 520 + 18i LM Curve
ef
.N
When government expenditure is increased by 100, the IS Curve equation becomes:
0.6Y = 650 + 100 8i
27
-4
And LM Curve will not change.
4-
02
At equilibrium:
31
0.6Y 750 + 8i = 0.6Y 520 18i
:8
1-
26i = 230
.IS
BN
i = 8.85
Equilibrium income will be
se
rv
re
Y = 1,132.
ed
0.6Y = 750 (8 8.85) = 679.2
ig
lr
First we can calculate Y
ht
323. (b) Transaction demand for money (Mt) = 0.3Y
Pr
es
s.
Al
The equation of the IS Curve is:

Y = 120 + 0.6Y + 150 80i
ve
rs
i
ty
Y = 270 + 0.6Y 80i
ni
Y 0.6Y = 270 80i
iU
or Y = 675 200i
....(i)
Ic
fa
20
04
Th
e
or 300 = 0.3Y + 120 160i

or Y = 600 + 533.33i
... (ii)
Putting the value of Y in equation (i), we have:

675 200i
= 600 + 533.33i
733.33i = 75
i = 75/733.33
i = 0.10%
Y = 675 200 0.10
Y = 655
Transaction demand for money = 0.3Y = 0.3 655 = 196.50.
324. (e) We know that
285
Macroeconomics
= C + I + G .......(1)
Where,
C
= Consumption function
= Investment function
= Exogenous government expenditure and the estimated relations for an economy
= 75 + 0.80 Yd
= 150 16i
= 31
04
= 0.15Y
04
20
04
Yd = Y T
Md = 80Y 2,400i
M
AC
Ms = 3,200
Substituting C, I and T values in equation (1) we get
o.
= 75 + 0.80(Y 0.15Y) + 150 16i + 31
ef
.N
= 75 + 0.80Y 0.12Y + 150 16i + 31
27
-4
Y(1 0.68) = 256 16i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
0.32Y
= 256 16i
Y
= 800 50i ...... (2)
At equilibrium:
Md = Ms
80Y 2,400i = 3,200
Substituting the value of Y in equation (2)
80 (800 50i) 2,400i = 320
64,000 4,000i 2,400i = 3,200
6,400i = 60,800
i = 9.5
By substituting the value of i in equation (2) we get the equilibrium level of income
Y = 800 50(9.5) = 800 475 = 325
Once the equilibrium level of income is found out the other variables can be estimated:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
T
= 0.15 Y = 15/100 325 = 48.75
Budget surplus of the government = T G = 48.75 31 = 17.75
Budget surplus of the government is 17.75.
325. (c) Y = C + I + G
When the government expenditure increases to 63,
Y = 75 + 0.80(Y 0.15Y) + 150 16i + 63
Y = 75 + 0.80Y 0.12Y + 150 + 16i + 63
0.32Y = 288 16i
Y
= 900 50i ...... (1)
At equilibrium:
Md = Ms
80 Y 2,400i = 3,200
Substituting the value of Y i.e., equation (1), we get
80 (900 50i) 2,400i = 3,200
72,000 4,000i 2,400i = 3,200
286
Part II
72,000 6,400i = 3,200

6,400i = 68,800
i
= 10.75
By substituting the value of i in equation (1) we get

Y = 900 50 (10.75)
= 900 537.5 = 362.50
The equilibrium income will be 362.50.
04
04
20
= 502 + 0.80Yd
326. (b) Savings (S)
Yd
04
Consumption (C) = 502 + 0.80 Yd
M
AC
=YT+R
o.
= Y 0.25Y + 60 = 0.75 + 60
= 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y
ef
.N
-4
27
=C+I+G+EM
02
IS Curve:
0.25
31
= 5,840 40i
1-
(1460 10i )
:8
BN
4-
= 550 + 0.60Y + 400 + 0.25Y 10i + 360 + 150 0.10y = 1460 + 0.75 10i
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
= 0.1Y 30i
ig
ht
s.
Al
lr
0.15Y 30i = 480
( 480+30i )
= 3200 + 200i
Pr
es
ve
rs
i
ty
0.15
iU
ni
Ic
fa
5840 40i = 3200 + 200i

= 2640
= 11%
= 3200 + (200 11)
= 5400.
20
04
Th
e
240i
327. (a) Amount of Total Issue
Financial Interrelations Ratio Net Capital Formation.
1.21 98,667.3 = 1,19,387.4.
328. (d) Amount of Primary Issues
New Issue Ratio Net Capital Formation.
0.64 98,667.3 = 63,147.1.

287
Macroeconomics
329. (e) Amount of Secondary Issues
Intermediation ratio Primary Issues
0.72 63,147.1 = 45,465.91.
330. (b)
National Income for 2001 = NNP at Factor Cost

NNP at Factor Cost = NNP at MP Indirect Taxes + Subsidies
= 89,405.3 9,782.00 + 4,313.02 = 83,936.32
04
National Income for 2002 = 93,103.01 10,201.00 + 5,203.01 = 88,104.02
04
Total Issues for 2001 = Secondary Issues + Primary Issues
04
20
= 9,031.12 + 10,524.16 [i.e., 4051.11 + 6021.01 + 452.04] = 19,555.28
Total Issue for 2002 = 11,021.01 + 10613.96 = 21,634.97
23.29
M
AC
R
-4
1.26
100 = 5.4%.
23.29
27
02
( 24.55 23.29 )
Percentage in Financial Ratios =
ef
.N
21,634.97
100 = 24.55
88,104.62
4-
Financial ratio for 2002 =
19,555.28
100 = 23.29
83,936.32
o.
Financial Ratio for 2001 = Total Issues/National Income x 100 =
BN
:8
1-
31
1+ Cu
331. (c) Money supply = H
Cu + r
ht
re
222
1,294
lr
s.
Al
Pr
es
ty
ve
rs
i
60
72
620
60
ed
Assets
Financial assets
1,516 Credit to State Govt.
Credit to banks
Other assets
812
2,328
Rs.
Rs.
875
950
421
40 2,286
42
2,328
= 1516 + 120 = 1636
iU
ni
Rs.
se
rv
Rs.
ig
Liabilities
A. Monetary liabilities
Other deposits
Other monetary liabilities
B. Non-monetary liabilities
Government deposits
Others
Share capital
Reserves
.IS
where H is High Powered Money = Money Liabilities of Central Bank + Government Money.
Th
e
Ic
fa
Money supply = 1636
1 + 0.3
= 5,317.
0.3 + 0.10
20
04
332. (a)
Liabilities
Government deposits
Net worth
Monetary Liabilities
Bank deposits
Other liabilities
Rs.
42
740
Rs.
Assets
782 Credit to Bank
220
Foreign Exchange assets
1,760 1,980 Other assets
2,762
High Powered Money

= Monetary liabilities of Central Bank + Government money
= 1,980 + 201= 2,181
288
Rs.
1,420
432
594
202
42
2,726
Part II
1 + Cu
Money supply substituting figures in the above formula = H
Cu + r
1 + Cu
= 2181
Cu + 0.07
8,542
8,542 Cu + 597.94 = 2,181 + 2,181Cu

631Cu
= 1,583.06
Cu
= 1,583/631
04
04
1 + 0.25
= 3.9062.
0.25 + 0.07
20
Money Multiplier =
= 0.25 (approx.)
04
333. (c) New Issue Ratio = New Issues/Net Capital Formation
= 20,253
For 2002 = 16,000/0.79
M
AC
= 17,073
o.
For 2001 = 14,000/0.82
New Issues = Secondary Issues/Intermediation Ratio
-4
27
17, 073
= 0.681.
25, 058
4-
New Issue Ratio 2001 =
= 25,058
02
For 2001
ef
.N
Net Capital Formation = Total Issues/Financial Interrelation Ratio
1-
31
334. (e) Secondary Issues = Primary Issue Intermediation Ratio.
BN
.IS
For 1982 = 11,000 1.18 = 12,980
:8
For 1981 = 10,000 1.24 = 12,400
12, 400 + 10, 000

= 72,258
0.31
For 1982 =
12,980 + 11, 000

= 82,689
0.29
s.
Al
lr
ig
ht
re
se
rv
For 1981 =
ed
National Income = Total Issues/Finance Ratio
Pr
es
National Income = NNP at MP Indirect taxes + subsidies

As there are no subsidies:
ve
rs
i
ty
Indirect Taxes = NNP at Mp National Income
ni
For 1981 = 75,000 72,258 = 2,742
fa
iU
For 1982 = 85,000 82,689 = 2,311
Ic
Change in Indirect Tax = 2,311 2,742 = 431.
20
04
Th
e
335. (b) New Issue Ratio = Primary Issues/Net Capital Formation
Primary Issues = Secondary Issues/Intermediation Ratio

= 12,000/0.82 = 14,634
= (12,000 +14,634)/1.22 = 21,831
New Issue Ratio = 14, 634 = 0.67.
21,831
336. (c) Net Capital Formation = Primary Issues/New Issue Ratio
14, 000
= 20,588.
0.68
289
Macroeconomics
337. (b) Total Issue = Financial Interrelation Ratio Net Capital Formation
Net Capital Formation = Primary Issues/New Issue Ratio =

Total Issue
14, 000
= 20,588
.68
= 1.32 20,588 = 27,176.
338. (a) Intermediation Ratio = Secondary Issues/Primary Issues
Secondary Issues = Total Issues Primary Issues

Total Issue = Financial Interrelation Ratio Net Capital Formation.
04
14, 000
= 20,588
0.68
04
Net Capital Formation = Primary Issues/New Issue Ratio =
20
Total Issue = 1.32 20,588 = 27,176
04
Secondary Issues = 27,176 14,000 = 13,176
M
AC
o.
Y
Ms
ef
.N
339. (e) Velocity of Money =
Intermediation Ratio = 13,176/14,000 = 0.94.
= C + I + G + E M = 500 + 150 + 140 + 80 60 = 810
-4
= 810/162 = 5.
02
27
Velocity of Money
4-
340. (b) High-powered money (H)
1-
31
= Monetary Liabilities of Central Bank + Government Money
:8
= 10,000 + 2,000 = 12,000

(M) = 45,000
1.33
45,000 = 12,000
0.33 +
ht
re
se
rv
ed
Money Supply
.IS
BN
Currency-Deposit Ratio (Cu) = 0.33
s.
Al
1,110
= 0.025
45, 000
Pr
es
r =
lr
ig
45,000 [0.33 + r] = 15,960 14,850
ty
The Reserve Requirements = 0.025.
ve
rs
i
341. (c) Reserves are decreased by 600 = 4,000 600 = 3,400
iU
ni
Volume of demand deposits increased by 1,000 = 16,000 + 1,000 = 17,000
fa
Reserve Requirements= 3,400/17,000 = 0.2.
20
04
Th
e
Ic
342. (d) M3 = Currency with public + Deposits money of the public + Time deposits with banks.
= 1,000 + 400 +300 = 1,700.
343. (a)
Liabilities
Government deposits
Net worth
Monetary liabilities
(Balancing figure)
Rs.
Assets
140 Credit to government

20 Credit to banks
800 Credit to commercial sector
1,500 Foreign exchange assets
Other assets
2,460
290
Rs.
1,400
600
400
20
40
2,460
Part II
Money Supply =
1+ C u
xH
r + Cu
where, Cu
r
and, H
where, x
= 0.3
= 5%
= 1,500 + x
= Government Money
5,942
2079.7
= 1950 + 1.3x
04
04
1+ 0.3
[1500 + x ]
0.05 + 0.3
04
20
129.7
= 99.76.
1.3
W
M
AC
o.
ef
.N
10, 613.96
= 0.61
17, 421.03
New Issue Ratio for year 2002 =
-4
10,524.16
= 0.64
16,420.01
27
New Issue Ratio for year 2001 =
344. (e) New Issue Ratio = Primary Issues/ Net Capital Formation
Primary Issues
= 4,051.11 + 6,021.01 + 452.04 = 10,524.16
1-
31
0.03
100 = 4.6%.
.64
:8
Percentage change in New Issue Ratio =
4-
02
Percentage change = 0.61 0.64 = 0.03
BN
345. (b) Intermediation Ratio = Secondary Issues/Primary Issues
ed
.IS
9,031.12
= 0.86
1024.16
se
rv
Intermediation Ratio for year 2001 =
11,021.01
= 1.04
10,613.96
ig
ht
re
Intermediation ratio for year 2002 =
s.
Al
lr
Percentage change in Intermediation Ratio =
1.04 0.86
100 = 21%.
0.86
iU
ni
ve
rs
i
ty
Pr
es
346. (e) High-powered money in the economy (H) = Currency + Reserves

= 4,000 + 1,000 = 5,000
Given, Currency Deposit Ratio (Cu) = 0.4
Reserve ratio (r)
= 0.10
Th
e
Ic
fa
1 + Cu
1 + 0.4
Money Supply in the Economy (M) = H
= 5,000
0.4 + 0.10
Cu + r
20
04
= 5,000 2.8 = 14,000.
1 + Cu
1 + 0.4
347. (a) The money multiplier at the original level =
=
= 2.8
0.4 + 0.10
Cu + r
To maintain the money supply at the original level, money multiplier should be maintained at
the original level of 2.8.
1 + 0.2
0.2 + r
= 2.8
1.2 = 0.56 + 2.8r

r
= 1.2 0.56/2.8 = 0.2285.
The reserve ratio should be increased to 0.2285 i.e., 22.85%.
291
Macroeconomics
348. (b) Finance Ratio = Total Issues/National Income = 0.25
Given National Income = 96,000

= 96,000 0.25 = 24,000.
Total Issues
349. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60
= Total Issues/Financial Interrelation Ratio
Total Issues = National Income Finance Ratio

Finance Ratio = Total Issues/National Income = 0.25
= 96,000 0.25 = 24,000
= 24,000/1.60 = 15,000.
04
= New Issues/Net Capital Formation
350. (c) New Issue Ratio
04
Total Issues
04
= 96,000
20
Given National Income
= Total Issues/National Income = 0.25
M
AC
Finance Ratio
o.
= National Income Finance Ratio
ef
.N
Total Issues
-4
= 96,000 0.25 = 24,000
Total Issues
Net Capital Formation = Total Issues/Financial Interrelation Ratio.
4-
31
New Issues = New Issue Ratio Net Capital Formation
02
27
Net Capital Formation = 24,000/1.60 = 15,000
:8
1-
= 0.85 15,000 = 12,750.

351. (d) Intermediation Ratio = Secondary Issues/New Issues = 0.88
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN

Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60
Total Issues = National Income Finance Ratio
Finance Ratio = Total Issues/National Income = 0.25
Total Issues
= 96,000 0.25 = 24,000
= 0.85 15,000 = 12,750
Secondary Issues = Intermediation Ratio New Issue
= 0.88 12750 = 11,220.
20
04
Th
e
Ic
352. (a) Intermediation Ratio = Secondary Issues/New Issues
= 8,985/10,595 = 0.84.
353. (e) New Issue Ratio = Primary Issues/Net capital formation
= 10,595/13,680 = 0.77.
354. (c) The High-Powered Money (H) = 18,950
Current Deposit Ratio
(Cu) = 0.5
Reserve Ratio
(r)
= 0.1
Money Multiplier
1 + Cu
1 + 0.5
=
= 2.5
=
C
+
r
0.1
+ 0.5
u
Money Supply
= H 2.5
= 18950 2.5
= 47,375. (1)
292
Part II
Central Bank purchasing Rs.8,970 worth government securities will increase the high
powered money by the same amount, i.e., Rs.9,970.
= H 2.5 = (18,850 + 8,970) 2.5
The Money Supply
= 69,800(2)
Increase in money supply = (2) (1)
04
20
04
Credit to Government + Credit to Banks + Credit to Commercial Sector

+ Foreign Exchange Assets
M
AC
Financial Assets =
04
= 69,800 47,375 = 22,425.

355. (b) High Powered Money (H)
=
Monetary Liabilities of Central Bank + Govt. Money
Since government money is said to be negligible,
High Powered Money (H)
=
Financial Assets + Other Assets Non-Monetary Liabilities.
1,780 + 410 + 112 + 15 = 2,317
ef
.N
o.
Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth.

= 21 + 11 + 510 = 542
= 78
= 2,317 542 + 78
Money supply
= H
-4
Other assets
H
02
27
= 1,853
BN
:8
356. (d) If the money supply is to be reduced by 18%;
1-
31
4-
1 + Cu
1 + 0.30
= 1,853
= 7,085.
r + Cu
0.40 + 0.3
.IS
The money supply will be:
ed
7,085 1,275.3 = 5,809.7
re
s
1 + 0.3
r + 0.3
ht
= 1,853
lr
ig
5,809.7
se
rv
The new reserve ratio will be:
1
r + 0.3
ty
Pr
es
ni
ve
rs
i
2.412
1
r + 0.3
s.
Al
5,809.7
1
1,853
1.3
20
04
Th
e
Ic
fa
iU
r + 0.3
1
2.412
= 0.41463 0.3 = 0.1146
= 11.46%.
357. (a)
Liabilities
Non-monetary liabilities
Net worth
Government deposits
Bank deposits
Amount Assets
Financial assets
1,000 Credit to government
50 Credit to banks
25 Credit to commercial sector
125 Other assets
1,970
3,070
Amount
1,750
750
500
20
50
3,070
Monetary Liabilities of the Central Bank = Total Assets Non-Monetary Liabilities

293
Macroeconomics
= 3,070 1,075 = 1,995

High Powered Money (H)
= Monetary Liabilities of the RBI + Government Money
= 1,995 + 5 = 2,000 million
1 + Cu
r + Cu
Money Supply = H
=
0.34 + 1
2,000
0.34 + r
0.34 + 1
0.34 + r
1.02 + 3
= 1.34
3r
= 0.32
= 0.106 (or) 10.6%.
o.
M
AC
04
20
04
04
6,000
-4
27
High-Powered Money (H) = 2,000 + 550 = 2,550 million
ef
.N
358. (d) When the Central Bank credit to Government is increased by 550 million, this affects the
financial assets of the Central Bank. Hence high-powered money will increase by 550 million.
02
If the Central Bank wants to contain the money supply at the original level of 6,000 million:
=(M) (2,000 + 550)
6,000
= 2.3529
2,550
1+ Cu
= 2.3529 =
Cu + r
1.34
= 0.799 + 2.3529r
= 0.541/2.3529
= 0.23 or 23%.
1+ 0.34
= 2.3529
0.34 + r
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
6,000
Pr
es
359. (c) Intermediation Ratio
ve
rs
i
ty
or, Secondary Issues
Ic
fa
iU
ni
Total Issues
= Secondary Issues/New Issues

= Intermediation Ratio New Issues
= 0.65 15,000 = 9,750
= Secondary Issues + New Issues
= 9,750 + 15,000 = 24,750
Financial Ratio
= Total Issues/Net Capital Formation
Or, Net Capital Formation
= 24,750/1.60 = 15,468.75.
Th
e
20
04
31
4-
Money Supply (Ms) = Money Multiplier (M) High-Powered Money (H)
360. (e) Stock of High-Powered Money (H) = 1,000
Currency Deposit Ratio (Cu)
= 0.8
Reserve Ratio (r)
= 0.2
Money Supply and High-Powered Money are related to each other by the following formula:
294
1 + Cu
=
H
Cu + r
1 + 0.8
=
1,000 = 1.8 x 1,000 = 1,800.
0.8 + 0.2
Part II
361. (b) Money Multiplier =
1 + Cu
r + Cu
Cu
= 1.2r = 0.1
Multiplier
= 2.2/1.3 = 1.69.
362. (a) High-Powered Money (H)

Since government money is said to be negligible
H
= Monetary Liabilities of the Central Bank
04
04
= Financial Assets + Other Assets Non-Monetary Liabilities.
04
20
Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector +

= 500 + 200 + 50 + 7 = 757
M
AC
Other Assets = 35
o.
Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth
ef
.N
= 10 + 5 + 250 = 265
-4
High-Powered Money = 757 + 35 265
02
27
Money = 527
= Reserve Ratio
.IS
= 0.05
ht
1 + Cu
= 527
Cu + 0.05
re
And High Powered Money = 527
se
rv
ed
Given Money Supply = 1,957

Reserve Ratio
:8
= Currency Deposits Ratio
BN
where Cu
1-
31
4-
1 + Cu
Money supply = H
Cu + r
s.
Al
lr
ig
1,957
ve
rs
i
ty
Pr
es
1957
1 + Cu
=
= 3.7135
527
Cu + 0.05
1 + Cu
= 3.7135Cu + 0.1857
Th
e
Ic
Cu
fa
iU
ni
2.7135 Cu = (1 0.1857)
=
0.8143
0.30 = 30%.
2.7135
20
04
363. (e)
Liabilities
Other deposits
(Balancing figure)
Non monetary liabilities
Government deposits
Other
Net worth
Rs. Assets
Financial assets
50 Credit to government
750 Credit to banks
20 Foreign exchange assets
10 Other assets
400
1,230
Rs
700
300
200
10
20
1,230
295
Macroeconomics
High-Powered Money (H)

Since the government money is negligible.
= Monetary Liabilities of the Central Bank = 800
1 + Cu
Money Supply = H
Cu + r
04
Given that the total money supply is 2400 and Cu is 0.35
= 10%.
20
04
= 1.35
3 x (0.35 + r)
04
1 + 0.35 1.35
2400 = 800
=3
0.35 + r 0.35 + r
= Currency + Reserves
364. (c) Stock of Currency (H)
ef
.N
o.
M
AC
1.35 1.05
= 0.10
3
Money Supply (M)
= 16,500
Reserve Ratio (r)
= Let us assume X
27
= 0.3
:8
1-
31
4-
02
Currency-Deposit Ratio (Cu)
-4
= 5,000 + 500 = 5500
1 + Cu
xH
Cu + r
ed
.IS
BN
Money Supply and High-Powered Money (that is with the public) are related to each other by
the following formula.
= 2200
= 0.13
ni
ve
rs
i
16,500 X
= 4950 + 16,500X
ty
7150
= 16,500 (0.3 + X)
Pr
es
(1 + 0.3) 5,500
s.
Al
lr
ig
ht
1 + 0.3
5,500 = 16,500
0.3+ X
re
se
rv
= M
fa
iU
The reserve ratio that the Central Bank must impose (approximately) is 0.13.
Ic
365. (e) High-Powered Money (H) = Monetary Liabilities of RBI + Government Money
20
04
Th
e
Monetary Liabilities of RBI
= Financial Assets + Other Assets Non-Monetary Liabilities
Financial Assets = Credit to Government + Credit to Bank + Credit to Commercial Sector

+ Foreign Exchange Assets
= 950 + 350 + 125 + 25 = 1450
Other Assets = 65
Non-Monetary Liabilities = Government Deposits + Other Non-Monetary Liabilities + Net Worth
= 20 + 5 + 500 = 525
= 1,450 + 65 525 = 990
Government Money
= 10
High Powered Money (H) = 990 + 10 = 1,000
296
Part II
1 + Cu
=
H
Cu + r
Total Money Supply
Given, Total Money Supply = 4,000

Currency Deposit Ratio
= 0.20
High Powered Money (H) = 1,000
1.2
= 0.8 + 4r
04
1 + 0.20
=
=4
0.20 + r
20
04
1.20 0.8
= 0.10.
4
04
Money Multiplier
ef
.N
o.
M
AC
Reserve Ratio is 10%.

366. (b) When the Central Bank credit to Government is increased by 100 millions, and
simultaneously Government purchases foreign exchange worth 10 millions from the Central
Bank, the net increase in the financial assets of the Central Bank is 90. Hence, high powered
money will increase by 90.
02
27
-4
1 + 0.20
=
=4
0.20 + r
Money Multiplier
31
4-
Given the Money Multiplier = 4
ed
se
rv
where, Cu = Currency Deposit Ratio

r
= Reserve Ratio
.IS
BN
:8
1 + Cu
367. (d) Money multiplier in the economy =
Cu + r
1-
Increase in Money Supply = 90 4 = 360 million units of currency.
Pr
es
s.
Al
lr
ig
ht
re
Money Supply in the Economy = Money Multiplier High-Powered Money Central Bank
purchase of Government Securities worth 200 will increase
the High-Powered Money from the initial 800 to 1,000.
If the money supply is to remain at 4,000;
ve
rs
i
ty
Money Multiplier should be reduced to

=4
=4
1 + 0.2
= 4
r + 0.2
fa
iU
ni
1 + Cu
Cu + r
4000
1000
20
04
Th
e
Ic
1.2
= 4r + 0.8 = 0.4 4r
r
= 0.1.
368. (a) When reserves are decreased by 500, the new reserve will be:
2400 500
= 1900
Reserve requirement = 20%
Demand deposits that can be supported with the lower reserves and lower reserve
requirement are:
1900/0.20
= 9500
Decrease in demand deposits = 9600 9500 = 100.
369. (c) Intermediation Ratio = Secondary Issues/Primary Issues
For year 2001 =
7,862.50
7862.50
= 0.85.
=
9250
8525 + 725
297
Macroeconomics
370. (e) Financial Interrelations Ratio = Secondary Issues/New Issues
Secondary Issues = Intermediation Ratio New Issues
Other Assets
M
AC
04
20
04
04
Secondary Issue for 2001 = 0.75 10,000 = 7,500

Total Issues = Secondary Issues + New issues
Total Issues for 2001 = 7,500 + 10,000 = 17,500
Financial Intermediation Ratio = Total Issues/Net Capital Formation
Net Capital Formation = Total Issues/Financial Intermediation Ratio.
Net Capital Formation for 2001 = 17,500/1.75 = 10,000.
371. (b) Monetary Liability of the Central Bank
= Financial Assets + Other Assets Non-Monetary Liabilities Financial Assets
= Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign
Exchange Assets
= 1,080 + 300 + 420 + 250 = 2,050
= 500
ef
.N
o.
Non-Monetary Liabilities
= Government Deposits + Net Worth + Other Non-Monetary Liabilities
27
-4
= 300 + 400 + 350 = 1,050
02
Monetary Liabilities = 2,050 + 500 1,050 = 1,500
1-
31
4-
(Currency issued by Central Bank and deposits of banks with Central Bank are apart of
monetary liability).
:8
High-Powered Money = Monetary Liabilities of the Central Bank + Government Money
.IS
BN
Since Government Money is negligible and can be ignored,
ed
High-Powered Money (H) = 1,500
ht
re
se
rv
1 + Cu
Money Supply in the Economy = H
Cu + r
s.
Al
lr
ig
1 + 0.2
Money Supply = 1500
= 7,200 million units of currency.
0.2 + 0.05
Pr
es
372. (e) Monetary Liability of the Central Bank
Financial Assets + Other Assets Non-Monetary Liabilities
ve
rs
i
ty
Financial Assets
ni
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign

Exchange Assets
fa
iU
Th
e
Ic
1,080 + 300 + 420 + 250 = 2,050
20
04
Other Assets = 500

= Government Deposits + Net Worth + Other Non-Monetary Liabilities
= 300 + 400 + 350 = 1,050
Monetary Liabilities = 2,050 + 500 1,050 = 1,500
(Currency issued by Central Bank and deposits of banks with Central Bank are apart of
monetary liability)
High-Powered Money = Monetary Liabilities of the Central Bank + Government Money
Since Government money is negligible and can be ignored,
298
= 1,500
Part II
If an additional credit of 500 million units of currency is granted to government, the highpowered money will be 1,500 + 500 = 2,000
Money Supply = 2,000 4.8 = 9,600
Money Supply will increase by 9,600 7,200 = 2400 million units of currency.
373. (d) Given,
o.
375. (a) Net Capital Formation = Total Issues/Financial Interrelations Ratio
ef
.N
Total Issue = Primary issue + Secondary Issue
27
-4
90,000 0.75 = 67,500
Secondary Issues = Primary Issues Intermediation Ratio
31
1:8
1,57,500
= 1,05,000.
1.5
4-
02
Total Issue = 90,000 + 67,500 = 1,57,500

Net Capital Formation =
04
M
AC
= 90,000 0.75 = 67,500.
20
W
= (3 4) + 6 = 18%
Given money multiplier is 3
Rate of growth of reserve money
= 18/3 = 6%.
374. (c) Secondary Issues = Primary Issues Intermediation Ratio
04
3.0
4% and
6%
a.gY + gP
04
=
=
=
=
Income elasticity of demand for real balances (a)

Expected rate of growth in real GDP (gY)
Acceptable rate of inflation (gP)
Rate of growth of money stock (gM)
BN
376. (e) National Income = Total Issues/Finance Ratio
ed
.IS
Total Issues = Primary Issue + Secondary Issue
se
rv
Secondary Issue = Primary Issue Intermediation Ratio.
re
= 1,98,240 0.76 = 1,50,662.4
= 1,50,662.4 + 1,98,240
ht
Total Issue
s.
Al
lr
ig
National Income = 3,48,902.4 0.33 = 10,57,280.
Pr
es
377. (c) New Issue Ratio = Primary Issues/Net Capital Formation
Net Capital Formation = Total Issues/Financial Interrelations Ratio
ve
rs
i
ty
Total Issues = Primary Issues + Secondary Issue
iU
ni
Secondary Issues = Primary Issues Intermediation Ratio

= 1,98,240 0.76 = 1,50,662.4
Ic
fa
Total Issues = 1,98,240 + 1,50, 662.4 = 3,48,902.4
Th
e
Net Capital Formation = 3,48,902.4 1.60 = 2,18,064
20
04
New Issues Ratio = 1,98,240/2,18,064 = 0.91.

378. (b) Given,
Income elasticity of demand for real balances (a)
= 2.0
Expected rate of growth in real GDP (gY)

Acceptable rate of inflation (gP)
Rate of growth of money stock (gM)
= 5%
= 5%
= a.gY + gP
= (3 4) + 6 = 18%
Given money multiplier is 3

Rate of growth of reserve money
= 15/3
= 5%.
299
Macroeconomics
379. (e) Financial Assets of the Central Bank

Exchange Assets
= 3,500 + 1,500 + 1,000 + 40
= 6,040 million units of currency
Other Assets = 100 million units of currency
Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities
= 100 + 2,000 + 50
04
04
Monetary Liabilities = FA + Other Assets Non-Monetary Liabilities
04
20
= 6,040 + 100 2,150
M
AC
High-Powered Money (H) = Monetary Liabilities of the Central Bank + Government Money
= 3,990 + 10 = 4,000 million units of currency
ef
.N
o.
1 + Cu
Money Supply = H
Cu + r
27
-4
where Cu = Currency Original Ratio
02
r = Reserve Ratio
31
4-
Given the desired money supply is 12,000, money multiplier is:
1-
:8
.IS
1 + 0.34
= 3 = 1.02 + 3r = 1.34
0.34 + r
se
rv
=3=
ed
1 + Cu
Cu + r
re
1.34 1.02
= 10.67%.
3
ig
ht
12,000
=3
4,000
BN
Desired Money Supply/High Powered Money =
s.
Al
lr
380. (b) Financial Assets of Central Bank are:
Pr
es
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets
= 1,000 + 400 + 100 + 14 = 1,514
ty
= 70
ve
rs
i
Other Assets
Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities
iU
ni
= 20 + 500 + 10 = 530
Ic
fa
Monetary Liabilities = Financial Assets + Other Assets Non-Monetary Liabilities
20
04
Th
e
= 1,514 + 70 530 = 1,054

Since Government Money is negligible, High-Powered Money (H) = 1,054
Given the Currency-Deposit Ratio (Cu) is 0.2, and Reserve Ratio (r) is 5%
1 + Cu 1 + 0.2
Money Supply in the Economy =
1, 054
=
Cu + r 0.2 + 0.05
= 5059.2 million units of Currency.

381. (d) If the money supply is to be reduced by 20%, the money multiplier value is to be reduced
by 20%.
1 + Cu
1 + 0.2
=
= 4.8
0.2 + 0.05
Cu + r
Reduce 20% of 4.8
300
Part II
The new money multiplier = 4.8 0.8 = 3.84

New Reserve Ratio:
3.84
= (1 + 0.2)/(0.2 + r)
r
= (1.2/3 .84) 0.2
r
= 11.25%.
382. (a) Intermediation Ratio = Secondary Issues/New Issues
Secondary Issues
Total Issues
= 0.78 24,000 = 18,720

= 24,000 + 18,720 = 42,720
National Income
= 42,720/0.26 = 1, 64,307.69.
20
o.
ef
.N
384. (d) Net Capital Formation = Total Issues/Financial Interrelations Ratio
M
AC
04
Secondary Issues
04
04
= 0.75 20,000 = 15,000.

383. (c) National Income = Total Issues/Finance ratio
Total Issues = Primary Issues + Secondary Issues
-4
Intermediation Ratio = Secondary Issues/New Issues
02
27
4-
= 0.75 x 20,000 = 15,000
1:8
= 35,000/1.6 = 21,875.
31
Net Capital Formation = (20,000 + 15,000)/1.6
.IS
BN
385. (b) The commodity market equation = 5,000 30i
ed
The demand for money equation = 0.3Y 300i
se
rv
The current money supply in the economy = 300 (MUC)
re
The LM equation will be:
ht
0.3Y 300i = 300
Pr
es
s.
Al
lr
ig
0.3Y = 300 + 300i

Y = 1,000 + 1,000i ---- LM equation
The IS equation is
ve
rs
i
ty
Y = 5,000 30i
ni
Equating the IS and LM equations gives the equilibrium rate of interest:
iU
1,000 + 1,000i = 5,000 30i
20
04
Th
e
Ic
fa
1030i = 4,000
= 3.88%
Thus,
Y = 5,000 30 3.88 = 4883.6 MUC
The growth rate in nominal stock of money will be:
gm = gY + gp
where,
gm = Growth in nominal money stock
= Income elasticity of demand for money = 1.2
gp = Rate of inflation = 5%
gY = Rate of growth of real GDP = 3.5%
301
Macroeconomics
Hence,
gm = (1.2 3.5 ) + 5 = 9.2%
Hence,
Expected nominal stock of money = 300 1.092 = 327.6 MUC.
386. (e) The cost of borrowing from the commercial banks will be:
5,000 30i
The demand for money equation
0.3Y 300i
The current money supply in the economy
300 (MUC)
04
20
04
The rate of real interest is:

The commodity market equation
04
Real Rate of Interest + Rate of Inflation + Higher charge by Commercial Banks
The LM equation will be;
M
AC
0.3Y 300i = 300
ef
.N
o.
0.3Y = 300 + 300i

Y = 1,000 + 1,000i ---- LM equation
The IS equation is:
27
-4
Y = 5,000 30i
02
Equating the IS and LM equations gives the equilibrium rate of interest:
31
= 3.88%
1-
:8
= 4,000
BN
1030i
4-
1,000 + 1,000i = 5,000 30i
.IS
The cost of borrowing from the commercial banks will be:
ig
ht
re
1+ Cu
H
Cu + r
lr
se
rv
387. (a) Money supply in the economy,
ed
3.88 + 5 + 2 = 10.88%.
= High-Powered Money
= Reserve Ratio
Pr
es
s.
Al
ty
Cu = Currency to Deposit Ratio

= Monetary Liabilities of RBI + Government Money
ve
rs
i
iU
ni
fa
= Financial Assets of RBI + Other Assets of RBI Non-Monetary Liabilities of RBI
Th
e
Ic
FA (RBI)
20
04
OA (RBI)
= 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC)

= 4,000 MUC
NML (RBI) = 1,000 + 405 + 35,000 = 36,405 MUC

Thus,
ML (RBI) = 42,200 + 4,000 36,405 = 9,795 MUC
Hence, H = 9,795 + 5 = 9,800 MUC
M =9800 x 1.4/0.5 = 27,440.

388. (c) Money supply in the economy,
1 + Cu
M = H
Cu + r
H = High-Powered Money
302
04
20
02
27
-4
ef
.N
o.
M
AC
04
r = Reserve Ratio
Cu = Currency to Deposit Ratio
H = Monetary Liabilities of RBI + Government Money
= Financial Assets of RBI + Other Assets of RBI Non-Monetary Liabilities of RBI
FA (RBI) = 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC)
OA (RBI) = 4,000 MUC
NML (RBI) = 1,000 + 405 + 35,000 = 6,405 MUC
Thus,
ML (RBI) = 42,200 + 4,000 36,405 = 9,795 MUC
Hence,
H = 9,795 + 5 = 9,800 MUC
M = 9800 x 1.4/0.5 = 27,440
The net increase in
H = 250 50 = 200 MUC
H = 9,800 + 200 = 10,000
1 + 0.4
M = 10,000
= 28,000
0.4 + 0.1
04
Part II
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
Increase in Money supply = 28,000 27,440 = 560.

389. (d) Net Issue Ratio
= Primary Issues by Non-Financial Sector/Total Physical Assets Formation
0.74 = X/2,00,445
X = 0.74 2,00,445 = 1,48,329.3 units
Hence, Primary Issues by Non-Financial Sector are 1,48,329.3 units.
Intermediation Ratio
= Volume of Financial Instruments issued by Financial Intermediaries/Volume of
Primary Issues by Non-Financial Sectors
= 1,15,605/1,48,329.3 = 0.779 or 0.78%.
390. (b) M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of
Savings Deposit with Banks + Other Deposits with RBI
= 1,52,737 + 99,106 + 5,627 = 2,57,470.
391. (e)
MUC Asset
30 Credit to Government
15 Credit to Banks
MUC
1,500
600
750 Credit to Commercial Sector

1,581 Foreign Exchange Assets
Other assets
2,376
150
21
105
2,376
20
04
Th
e
Ic
fa
iU
ni
Liabilities
Government Deposits
Other Non-Monetary
Liabilities
Net Worth
* Monetary Liabilities (ML)

= Total Assets Non-Monetary Liabilities (NML)
OR
=
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign
Exchange Assets + Other Assets Government Deposits Other Non-Monetary
Liabilities Net Worth
=
1,500 + 600 + 150 + 21 + 105 30 15 750
303
Macroeconomics
04
=
1,581 million Units of Currency
Stock of High-Powered Money (H)
As the government money constitutes a negligible proportion of total money supply, 1,581
million units represents total stock of High-Powered Money (H).
We have,
High-Powered Money (H) = 1,581 million units of currency
Currency-Deposits Ratio (Cu) = 0.30
Reserve Ratio (r) = 5%
04
20
04
1 + Cu
Money Supply (M) = H
r + Cu
ef
.N
o.
= Primary Issues + Secondary Issue
New Issue Ratio
Primary Issues /Net Capital formation
392. (c) Total Issues
M
AC
1 + 0.30
= 1,581
= 5,872.29 million units of Currency.
0.05 + 0.30
27
= Intermediation Ratio x Primary Issue

= 4,00,000 + 3,00,000 = 7,00,000.
BN
:8
Total Issues
1-
= 0.75 4,00,000 = 3,00,000
31
4-
Secondary Issues
02
Intermediation Ratio = Secondary Issues/Primary Issues
-4
= 5,00,000 0.80 = 4,00,000
Primary Issues
.IS
393. (a) Finance Ratio = Total Issues/National Income
ed
se
rv
New Issue Ratio = Primary Issues/Net Capital Formation
re
Primary Issues = 5,00,000 0.80 = 4,00,000
ig
ht
Intermediation Ratio = Secondary Issues/Primary Issues
s.
Al
lr
Secondary Issues = Intermediation Ratio x Primary Issue
Pr
es
= 0.75 x 4,00,000 = 3,00,000
ve
rs
i
ty
Total Issues = 4,00,000 + 3,00,000 = 7,00,000

National Income = 7,00,000/0.7 = 10,00,000.
ni
394. (d) High-Powered Money (H)
iU
= Monetary Liabilities of the RBI + Government Money
Ic
fa
= C+R
20
04
Th
e
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI
Or ML (RBI) = FA (RBI) + OA (RBI) NML (RBI)
Hence,
ML (RBI) = (1,750 + 500 + 750 + 20) + 50 (1,000 + 25 + 50)
= 3,020 + 50 1,075 = 1,995
High-Powered Money (H) = 1995 + 5 = 2,000
1 + Cu
Ms = H
r + Cu
1 + 0.34
6,000= 2,000
r + 0.34
304
Part II
1.34
=3
0.34 + r
1.02 + 3r = 1.34
3r
= 0.32
= 0.32/3 = 0.1067 = 10.67%.
395. (b) As per the given information, the high power money is:
04
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI
04
= Monetary Liabilities of the RBI + Government Money = C + R
20
Or ML (RBI) = FA (RBI) + OA (RBI) NML (RBI)
04
Hence, ML (RBI) = (1,750 + 500 + 750 + 20) + 50 (1,000 + 25 + 50)
M
AC
= 3,020 + 50 1075 = 1,995
27
-4
ef
.N
o.
High-Powered Money (H) = 1,995 + 5 = 2,000

The Central Bank credit to Government increases by 550. Hence the financial assets of RBI
increase by 550. Thus, the High-powered money now becomes:
H = 2,000 + 550 = 2,550
The new reserve ratio will be:
1.34
0.34 + r
:8
1-
31
4-
02
1 + 0.34
2,550
= 6,000
r + 0.34
.IS
BN
= 2.35
1.34 0.8 0.54

=
2.35
2.35
se
rv
= 0.229 or 22.9%.
re
ed
0.80 + 2.35r = 1.34
ig
ht
396. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation
s.
Al
lr
Finance Ratio = Total Issue/National Income

= 0.25 96,000 = 24,000
Pr
es
Total Issue
= 24,000/1.6 = 15,000.
ty
ve
rs
i
397. (a) Financial Interrelation Ratio = Total Issues/Net Capital Formation
ni
Finance Ratio = Total Issue/National Income

= 0.25 96,000 = 24,000
fa
iU
Total Issue
Th
e
Ic
20
04
New Issue ratio = Primary Issues/Net Capital Formation

Primary Issues
= 15,000 0.85 = 12,750
Total Issue
= Primary Issue + Secondary Issue
24,000
= 12,750 + Secondary Issue
Secondary Issue = Total Issue Primary Issue = 24,000 12,750 = 11,250.

398. (c) Finance Ratio = Total Issues/National Income
Total Issues = Secondary Issues + Primary Issues = 9,600 + 12,800 = 22,400

Finance Ratio = 22,400/89,600 = 0.25.
399. (e) Intermediation Ratio = Secondary Issues/Primary Issues
Secondary Issues = 9,600/12,800 = 0.75.
305
Macroeconomics
400. (b) Financial Interrelations Ratio = Total Stock of Financial Assets Incremental Physical Assets
Total Stock of Financial Assets

= Primary Issues + Secondary Issues = 12,000 + (13,400 + 1,600) = 27,000
Incremental Physical Assets = Net Physical Asset = 20,000
The Monetary Liabilities of the Central Bank are 1,054.
Primary Issues + Secondary Issues
68,500 + 47,445 = 1, 15,945
1, 15,945/6, 50,750 = 0.178.
04
BN
:8
1-
ed
Finance Ratio
Total Issues/National Income
.IS
Total Issues
31
402. (a) Finance Ratio
4-
02
27
-4
1 + 0.2
1.2
=
1,054 =
1,054 = 5,059.2.
0.2
+
0.05
0.25
ef
.N
o.
1 + Cu
=
1,054
Cu + r
Ms
20
400
100
14
70
1,584
04
20 Credit to Banks
10 Credit to Commercial Sector
500 Foreign Exchange Assets
Other Assets
1,584
Rs
1,000
Rs.
Assets
1,054 Credit to government
M
AC
Liabilities
(Balancing figure)
Government Deposits
Other non-Monetary Liabilities
Net Worth
04
Financial Interrelations Ratio = 27,000 20,000 = 1.35.

401. (d) We can prepare the Balance Sheet in order to find out the Monetary Liabilities.
se
rv
403. (d) New Issue Ratio = Primary Issues/Net Capital Formation
re
= 47,445/1,16,450 = 0.407.
ht
404. (c) Financial Interrelations ratio = Total Issues/Net Capital Formation
lr
ig
Total Issues = Primary Issue + Secondary Issues
s.
Al
= 69,000 + 50,000 = 1,19,000
Pr
es
Financial Interrelations Ratio = 1,19,000/1,20,000
ve
rs
i
ty
= 0.99166 = 0.992.
ni
405. (a) Money supply in the economy (Ms) = H.m.

1 + 0.35
=3
0.35 + 0.10
Ic
fa
iU
Money Multiplier (m) =
20
04
Th
e
High-Powered Money (H) = Government Money + Monetary Liability of RBI
Monetary Liability of RBI = Credit to Government + Credit to Banks + Credit to Commercial

Sector Foreign Exchange Assets + Other Assets Government
Deposits Net Worth Other Non-Monetary Liabilities.
= 1,000 + 400 + 300 + 20 + 10 80 300 5 = 1,345
H
= 1345 + 10
Money Supply
= 1355 MUC
= 1355 3 = 4,065.
406. (b) Money Multiplier (m)
1+0.35
=3
0.35+0.10

= Government Money + Monetary Liability of RBI Monetary Liability of RBI
306
Part II

Exchange Assets + Other Assets Government Deposits Net Worth Other NonMonetary liabilities.
= 1,000 + 400 + 300 + 20 + 10 80 300 5
H
= 1,345 + 10
= 1,345
= 1,355 MUC
If there is an additional inflow of foreign exchange assets, the

H
= 1,355 + 50
= 1,405
1 + 0.35
1405
0.35 + r
0.35 + r
1,405 1.35
4,065
04
B
W
= 0.4666 0.35 = 0.1166 = 11.66%.
M
AC
04
20
4,065
04
If the money supply is to be maintained at 4065 MUC,
o.
407. (d) Money Supply = m.H
1 + Cu
=
Cu + r
= Monetary Liability of RBI + Government Money
02
27
-4
ef
.N
31
4-
Cu = 0.30
= 0.10
1.30
1.30
= 3.25
=
=
0.30 + 0.10 0.40
se
rv
Monetary Liabilities of RBI (MLRBI)
ed
.IS
BN
:8
1-
ht
re
= Credit to Banks + Credit to Government + Credit to Commercial Sector + Net

Foreign Exchange Assets Net Worth Government Deposits + Other Assets
lr
ig
MLRBI = 2,000 + 4,500 + 500 + 6,000 1,000 300 + 200 = 11,900
s.
Al
Government Money = 100
ty
= 3.25 12,000 = 39,000 MUC.
ve
rs
i
Money Supply
Pr
es
ni
408. (b)
fa
iU
Money Supply = m. H
1 + Cu
=
Cu + r
= Monetary Liability of RBI + Government Money
Cu
= 0.30
= 0.10
1.30
1.30
= 3.25
=
=
0.30
+
0.10
0.40
20
04
Th
e
Ic
Monetary Liabilities of RBI (MLRBI)

= Credit to Banks + Credit to Government + Credit to Commercial Sector + Net
Foreign Eexchange Assets + Net Worth Government Deposits + Other Assets
MLRBI = 2,000 + 4,500 + 500 + 6,000 1,000 300 + 200 = 11,900
307
Macroeconomics
Government Money = 100

When foreign exchange inflow increases by 450 million MUC:
H
= 12,000 + 450 = 12,450
If the money supply should remain at 39,000 MUC
= 0.115 = 11.5%.
04
1.30 12,450
= 0.415
39,000
04
(0.30 + r) =
1.30
12,450
0.30 + r
04
20
39,000
409. (c) High Powered Money = Monetary Liabilities of Central Bank + Government Money
M
AC
Monetary Liabilities of Central Bank = Financial Assets + Other Assets Non-Monetary Liabilities
ef
.N
o.
Financial Assets = Credit to Government + Credit to Government + Credit to Commercial

Sectors + Foreign Exchange Assets
= 1,120 + 350 + 550 + 150 + 50 = 2,220
27
02
Monetary Liabilities of Central Bank = 2,170 470 = 1,700
-4
Non-Monetary Liabilities = 100 + 420 = 520
31
4-
High Powered Money = 1,700 + 25 = 1,725 MUC.
1-
410. (b) Demand for Money is estimated to be
BN
:8
L = 0.25Y 10i.
.IS
At i= 6 %, L = 0.25Y 60.
ed
At equilibrium demand for money = Supply of Money
se
rv
0.25Y 60 = 200
re
0.25Y= 260
ig
ht
Y = 1,040 MUC.
s.
Al
lr
411. (c) Velocity of Money = Y/MS
Pr
es
Y = C+ I + G + E M
= 750 + 275 + 160 + 40 30=1,195
ve
rs
i
ty
Velocity of Money = 1,195 / 239 = 5.
ni
412. (b) Finance Ratio = Total Issues/National Income 100
Ic
fa
iU
Total Issues = Financial Interrelation Ratio Net Capital Formation

= 1.5 15,500 = 23,250
20
04
Th
e
GNP at Market Prices = GDP at Market Price + Net Factor Income from Abroad
= 76,500 + 200 = 76,700
NNP at Market Prices = 76,700 2500 = 74,200

National Income = NNP at Factor Cost
= NNP at Market Prices Indirect Taxes + Subsidies
= 74,200 1,225 + 725 = 73,700
Finance Ratio = (23,250/73,700) 100 = 31.6.
413. (a) High Powered Money = Monetary Liabilities + Government Money
= 10,500 + 1,500 = 12,000

Ms = H
308
{(1 + C ) / ( C
u
+ r )}
Part II
48,000 =
12,000
{(1 + 0.25) / ( 0.25 + r )}
(1 + 0.25)/(0.25 + r) = 4 = 1 + 4r = 1 0.25
4r
0.25
0.0625 = 6.25%.
414. (e) Md = 500 + 0.2Y 20i
At equilibrium Ms = Md.
2,000
04
2,340 500 + 160
10,000 MUC.
04
20
0.2Y
500 + 0.2Y (20 8)
04
2,340 =
M
AC
o.
50% of total money which is held in the form of currency is Rs.2,500.

Demand deposit component of money supply is Rs.2,500.
415. (a) Total money = Rs.5,000.
02
27
-4
ef
.N
Given the reserve ratio of 10%, required reserves are 2,500 0.10 = Rs.250.
416. (a) Since foreign exchange inflows of 50 MUC increases the monetary liabilities by 50
MUC, the central bank can sold 50 MUC worth of government securities to bring back the
monetary liabilities to its original level to keep money supply at the same level.
4-
417. (e) High-Powered Money (H) = Monetary Liabilities or Central Bank + Government Money.
1-
31
Non Monetary Liabilities = 200 + 80 = 280
BN
:8
Financial Assets = Loans given to Government + Credit to Banks + Loans given to

Commercial Section + Foreign Exchange Assets
ed
.IS
= 1,200 + 800 + 20 + 1,500 = 3,520
re
se
rv
Monetary Liabilities = Financial Assets + Other Assets Non Monetary Liabilities

= 3,520 + 60 280 = 3,300
lr
ig
ht
M = 3,300 + 100 = 3,400 MUC.

418. (c) Stock of High Powered Money (H)
s.
Al
= Monetary Liabilities of the Central Bank + Government Money = 1,250 MUC

= 0.05
ve
rs
i
ty
Reserve Ratio (r)
Pr
es
Current Deposit Ratio (Cu) = 0.20
Money Supply Ms
iU
ni
20
04
Th
e
Ic
fa
419. (c) Money Supply, M =
1 + Cu
H
Cu + r
1 + 0.20
1, 250 = 4.8 1,250 = 6,000 MUC.
0.20 + 0.05
1 + Cu
H
Cu + r
1 + 0.40
500 = 2.8 500 = 1,400 MUC
0.40 + 0.10
If there is an additional inflow of 10 MUC of foreign exchange assets, H = 500 + 10 = 510

If money supply is to be maintained at 1,400 MUC,
1,400 = 510
1.40
( 0.40 + r )
or, 0.40 + r = 510
1.40
1, 400
or, 0.40 + r = 0.51

or, r = 0.11 = 11%.
309
Macroeconomics
420. (e) Finance Ratio =
Total issue
National Income
Total Issue = Finance Ratio National Income

= 0.50 19,200 = 9,600 MUC.
421. (b) Money supply = High Powered Money Money Multiplier
17,200 = 4,300. m
04
04
W
1 + Cu
=4
Cu + 0.10
M
AC
1 + Cu
Cu + r
20
m=
17, 200
=4
4, 300
04
or, m =
or, 1+ Cu = 4Cu + 0.40
ef
.N
o.
or, 3Cu = .06

or, Cu = 0.20.
-4
422. (a) Demand for money = Rs.5,000
02
27
Currency held in money form = Rs.2,500
31
4-
Reserve Ratio = 10%
2, 500 10
= Rs.250.
100
BN
:8
1-
Amount required by banks to meet the reserve requirement =
.IS
423. (c) Reserves are decreased by 1,200 = 8,000 1,200 = 6,800
ed
Volume of demand deposit increased by 2,000
ht
re
6,800
= 0.2.
34,000
ig
Reserve requirements =
se
rv
= 32,000 + 2,000 = 34,000
s.
Al
lr
424. (b) Intermediation Ratio = Secondary Issues/New Issues
Pr
es
ni
ve
rs
i
ty
= 0.68 18,000 = 12,240

Total Issues = Secondary Issues + New Issues
= 12,240 + 18,000 = 30,240
fa
iU
Financial Interrelations Ratio = Total Issues/Net Capital Formation
20
04
Th
e
Ic
Net Capital Formation = 30,240/1.75 = 17,280.

425. (e)
Liabilities
(Balancing Figure)
Government Deposits
Other Non-Monetary Liabilities
Net Worth
Total
Rs. Assets
2,685 Credit to Government
Credit to Banks
25 Credit to Commercial
Sector
18 Foreign Exchange Assets
522 Other Assets
3,250 Total
Rs
2,500
500
160
15
75
3,250
Thus Monetary Liabilities of the Central Bank is 2,685

1 + Cu
1 + 0.2
1.2
Ms =
2,685 =
2,685 =
2,685 = 12,888.
0.25
Cu + r
0.2 + 0.05
310
Part II
426. (a)
Amount
Assets
Financial Assets
235 Credit to Government
1,263 Credit to State Govt.
Amount
890
1,010
Credit to Banks
Other Assets
2,459
M
AC
H = Total Monetary Liabilities + Government Money

= 1,498 + 130 = 1,628
o.
ef
.N
1+ 0.3
= 5,291.
0.3+ 0.10
427. (d) Reserves are decreased by 750 = 5,000 750 = 4,250
-4
= 1,628
27
Money Supply
04
20
04
04
70
76
740
75
2,459
Government Deposits
Others
Share Capital
Reserves
460
55
44
Liabilities
Other Deposits
Other Monetary
Liabilities
1-
31
4,250
= 0.22.
19,200
:8
Reserve requirements =
4-
02
Volume of demand deposits increased by 1,200 = 18,000 + 1,200 = 19,200
BN
428. (a) M3 = Currency with Public +Deposit Money of the Public + Time Deposits with Banks
ed
.IS
= 2,250 + 630 + 535 = 3,415.
re
Assets
Credit to Banks
Credit to Commercial
Sector
1,701 Foreign Exchange Assets
Other Assets
2,708
Pr
es
s.
Al
lr
ig
ht
Liabilities
Government Deposits
Other Non-Monetary Liabilities
Net Worth
se
rv
429. (e)
ni
ve
rs
i
ty
(Balancing figure)
Rs.
1,525
675
435
25
48
2,708
1 + Cu
H
r + Cu
Ic
fa
iU
Money Supply =
Rs.
165
22
820
20
04
Th
e
where Cu = 0.4
r
= 6%
and H
= 1,701 + X
where X = Government Money =
1 + 0.4
(1,701 + X)
0.06 + 0.4
6,325(0.06 + 0.4) = 1 + 0.4 (1,701 + X)

2,909.5
= 1.4 (1,701 + X)
2,909.5
= 2,381.4 + 1.4X
1.4 X
= 2,909.5 2,381.4
1.4 X
X
= 528.1
= 528.1/1.4 = 377.2.
311
Macroeconomics
430. (b) High-Powered Money in the Economy (H)
= Currency + Reserves = 6,500 + 2,000 = 8,500

Given Currency Deposit Ratio = 0.5
Reserve Ratio (r)
= 0.12
Money Supply in the Economy (M)

1+ Cu
1 + 0.5
= H
= 8,500
= 8,500 2.4193 = 8,500 2.42 = 20,570.
Cu
+
r
0.5 + 0.12
04
20
= 0.6
04
Current Deposit Ratio (Cu)
04
431. (d) The High-Powered Money (H) Rs.22,550
M
AC
= H 2.22 = 50,061 .. (i)
ef
.N
Money Supply
1+ 0.6
= 2.22
0.6 + 0.12
o.
Money Multiplier = 1 + Cu/r + Cu =
Reserve Ratio (r) = 0.12
27
-4
Central Bank purchases Rs.12,500 worth Government securities will increase the high
powered money by the same amount,
4-
02
The Money Supply = H 2.5
1-
(ii)
:8
= 35050 2.22 = 77,811
31
= (22,550 + 12,500) 2.22
= 27,750.
.IS
BN
Increase in Money Supply = (ii) (i) =77,811 50,061
ed
432. (a) When reserves are decreased by 700, the new reserve will be: 3,200 700 = 2,500
se
rv
Reserve requirement = 25%
lr
= New Issues/Net Capital Formation
s.
Al
433. (e) New Issue Ratio
ig
ht
re
Demand deposits that can be supported with the lower reserves and lower reserve
requirement are 2,500/0.25 = 10,000.
Pr
es
Net Capital Formation = Total Issues/Financial Interrelations Ratio
ty
ve
rs
i
= 0.78 24,000 = 18,720
iU
ni
Financial Interrelations Ratio = Total Issues/Net Capital Formation
20
04
Th
e
Ic
fa
= Total Issues/Financial Interrelations Ratio

= (24,000 + 18,720)/1.50 = 28,480
New Issues ratio = 24,000/28,480 = 0.843.
434. (b) M3 = M1 + Time Deposits (i.e., Fixed Deposits) with Banks
M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of Savings
Deposits with Banks + Other Deposits with RBI
= 1,52,737 + 99,106 + 5,627 = Rs.2,57,470 crore
M3 = 2,57,470 + 4,83,560 = 7,41,030.

435. (a) Trade Balance = Merchandise Exports Merchandise Imports
= 34,954 36,984 = 2,030.
312
Part II
436. (d)
Balance of Payment Statement

for the year, 2000-2001
04
04
20
04
B
W
o.
M
AC
130
200
200
0
70
538
46
492
408
ef
.N
70
0
0
0
70
658
82
576
728
1-
31
4-
02
27
I. MERCHANDIZE
II. INVISIBLES (a + b + c)
a. Services
b. Transfers
c. Income
Total Current Account (I + II)
CAPITAL ACCOUNT
I. Foreign Investment (a+b)
200
a. In the country,
200
i. Direct
200
ii. Portfolio
0
b. Abroad
0
II. Loans
120
a. External Assistance
36
b. Short-Term
84
Total Capital Account (I + II)
320
Over all Balance of Payments
= Current Account Balance Capital Account Balance
= 6,314 408 = 5,906.
(US $ million)
Debit
Net
36,984 2,030
25,956 8,344
24,928 7,016
170
78
858 1,250
62,940 6,314
-4
Credit
34,954
34,300
31,944
248
2,108
69,254
1,325
+347
re
se
rv
ed
.IS
Net
400
53
100
122
Net
5,117
a. In India
5,191
Direct
2,167
Portfolio
3,024
74
1,601
891
By India
10
10
To India
901
333
By India
20
To India
313
c. Short Term
377
ve
rs
i
Foreign Investment (a + b)
iU
fa
Ic
Th
e
20
04
Debit
1,050
275
0
0
Capital Account
Credit
Debit
ni
ty
Particulars
Pr
es
438. (a)
Credit
1,450
222
100
122
0
1,672
s.
Al
lr
ig
ht
Particulars
Merchandize
Invisibles (a + b + c)
a. Services
b. Transfers
c. Investment income
Total current account
I
II
BN
:8
437. (c)
b. Abroad
II Loans ( a + b + c)
a. External Assistance
b. Commercial Borrowings
313
Macroeconomics
2,727
a. Commercial Banks
2,904
Assets
790
Liabilities
26
Non-Resident Deposits
2,140
177
IV Rupee Debt Service
711
711
V Other Capital
1508
10,242
Total Capital Account ( I to V)
04
III Bank Capital ( a + b)
b. Others
Net
04
Debit
20
Credit
04
Particulars
M
AC
The Open Economy and Balance of payments
439. (c) Capital Inflows Capital Outflows = 6,300 4,500 = 1,800 MUC (Deficit).
ef
.N
o.
440. (a) Trade Deficit for the year 2002-03
= Merchandise (credit) Merchandise (debit) = 53,000 65,474 = $12,474 million.
27
-4
441. (a) Total Current Account ( Credit)
02
= Merchandise + Services + Transfer + Income
31
4-
= 53,000 + 24,986 + 15,225 + 2,826 = 96,037
:8
1-
Total Current Account (Debit)
BN
= 65,474 + 18,780 + 367 + 7,708 = 92,329
.IS
Current Account Balance = 96,037 92,329 = $ 3,708 million (surplus).
se
rv
ed
442. (d) Net Foreign Investment in India = Foreign Direct Investment (credit) + Portfolio
Investment (credit) Foreign Direct Investment (debit) Portfolio Investment (debit)
re
= 4,790 + 7,535 1,179 6,591 = $ 4,555 Million.
ig
ht
443. (e) Overall Balance of Payment = Total Credit of the Bop Total Debit of the Bop
s.
Al
lr
= 1,46,559 1,29,579 = $ 16,980 million (surplus).
Pr
es
Modern Macroeconomics: Fiscal policy, Budget deficit, and Government Debt
ty
444. (b) Revenue Deficit = Revenue Expenditure Revenue Taxes
ve
rs
i
Revenue Expenditure = Non-Plan Expenditure + Plan Expenditure
ni
Revenue Receipts = Tax Revenue + Non-Tax Revenue
fa
iU
Interest Payment = Fiscal Deficit Primary Deficit
Th
e
Ic
= 1,53,637 30,414 = 1,23,223
20
04
Non-Plan Expenditure = 1,66,161 + 1,23,223 = 2,89,384

Revenue Expenditure = 2,89,384 + 76,843 = 3,66,227
Revenue Receipts
= 1,84,169 + 69,766 = 2,53,935.
Revenue Deficit
= 3,66,227 2,53,935 = Rs.1,12,292 crore.
445. (c) Revenue Deficit = Revenue Expenditure Revenue Receipt
Revenue Expenditure = Non Plan Revenue Expenditure + Plan Revenue Expenditure

= 2,89,384 + 76,843 = 3,66,227
Revenue Receipts = Tax Revenue + Non. Tax Revenue
= 1,84,169 + 69,766 = 2,53,935
Revenue Deficit = 3,66,227 2,53,935 = Rs.1,12,292 cr.
314
Part II
446. (d) Primary Deficit = Fiscal Deficit Interest Payment
Fiscal Deficit = Borrowings and Other Liabilities

Primary Deficit = 1,53,637 1,23,223 = Rs.30,414 cr.
447. (e) Revenue Receipts = Tax Revenue + Non-Tax Revenue
= 1,16,857 + 45,137 = 1,61,994.

448. (b) Capital Receipts = Recoveries of Loan + Other Capital Receipts + Borrowings and Other
liabilities
04
04
= 9,908 + 5,000 + 91,025 = 1,05,933.
20
Fiscal Deficit
449. (c)
04
= Total Expenditure (Revenue Receipts + Recoveries of Loan + Other Capital Receipts)
M
AC
Revenue Receipts = Tax Revenue + Non-Tax Revenue

= 1,16,857 + 45,137 = 1,61,994
ef
.N
-4
4-
02
Primary Fiscal Deficit = 1,11,275 1,01,266 = 10,009.
27
Fiscal Deficit = Borrowings and Other Liabilities = 1,11,275
450. (c) Primary Fiscal Deficit = Fiscal Deficit Interest Payments
o.
Fiscal Deficit = 2,67,927 (1,61,994 + 9,908 + 5,000) = 91,025.
1-
31
451. (a) Revenue Deficit = Revenue Expenditure Revenue Receipts
:8
Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Revenue Expenditure
.IS
BN
= 2,28,768 + 52,330 = 2,81,098
se
rv
= 1,46,209 57,464 = 2,03,673
ed
Revenue Receipts = Tax Revenue Non-Tax Revenue
re
Revenue Deficit = 2,81,098 2,03,673 = 77,425 crore.
lr
ig
ht
452. (e) Revenue Receipts = Direct Taxes + Indirect Taxes + Interest Receipts + Total Profits
s.
Al
= 40,000 + 120,000 + 12,000 + (17,000 + 13,000) = 2,02,000 cr.
Pr
es
453. (b) Non-Plan Expenditure = Interest Payments + Subsidies + Defense Expenditure
ve
rs
i
ty
= 47,000 + 1,32,000 + 30,000 = 2,09,000.

454. (d) Fiscal Deficit = Borrowing and Other Liabilities (or)
iU
ni
= Total Expenditure [Total Receipts Borrowings]
Ic
fa
= [2,83,882 (2,03,927 + X X)] = Rs.79,955.
20
04
Th
e
Working notes:
Total Expenditure = Total Revenue Expenditure + Total Capital Expenditure

= 2,36,987 + 46,895 = Rs.2,83,882 crore.
Total Receipts
= Total Revenue Receipts + Total Capital Receipts
[Tax and Non-Tax Revenue Receipts]+ [Loans Recovered + Other Capital

Receipts + Borrowings (not given)]
[1,32,365 + 50,475] + [11,087 + 10,000 + X] = Rs.2,03,927cr + X.
455. (d) Fiscal Deficits
Total Borrowings Any other receipts of which divestment

proceeds committed for redemption of Public Debt
Total Borrowings
1,12,275 1,000 = 1,11,275.
315
Macroeconomics
456. (b) Revenue Deficit = Total Revenue Expenditure Total Revenue Receipts
Total Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Expenditure

= 2,28,768 + 52,330 = 2,81,098
Total Revenue Receipt = Tax Revenue + Non Tax Revenue
= 1,46,209 + 57,464 = 2,03,673
Revenue Deficit = 2,81,098 2,03,673 = 77,425.
04
457. (b) Possible GDP growth = Possible level of investment/Capital Output Ratio = 25/5 = 5 %
04
Possible per capita GDP growth = 5 2 =3%.
04
20
458. (d) Target growth rate = 6% p.a.
Required domestic savings to income = 32%
M
AC
Expected population growth = 2%
ef
.N
32
= 4.
8
Capital Output ratio =
o.
Growth rate = 6 + 2 = 8%
27
-4
459. (a) Required savings to achieve the targeted growth rate in GDP is
02
= The incremental capital out put ratio Targeted growth rate
31
4-
= 4 7 = 28%
:8
1-
Required savings are 28% of GDP
BN
Domestic savings are 24% of GDP
.IS
Required external savings are = 28 24 = 4% of GDP.
se
rv
ed
460. (c) Increase in per capita GDP
re
= (1+growth rate in GDP)/(1+growth rate in Population)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
= (1.07/102) 1 = 0.049 = 4.9%.
316
Part III: Model Question Papers (with Suggested Answers)
M
AC
04
20
04
04
The model question paper consists of two parts A and B. Part A is intended to test the
conceptual understanding of the students. It contains around 40 multiple-choice questions
carrying one point each. Part B contains problems with an aggregate weightage of 60 points.
Students are requested to note that this is an indicative format of the question paper in general
and that the ICFAI University reserves the right to change, at any time, the format and the
pattern without any notice. Hence, the students are advised to use the model question papers for
practice purposes only and not to develop any exam-related patterns out of these model
question papers.
The suggested answers given herein do not constitute the basis of evaluation of the students
answers in the examination. These answers have been prepared by the faculty members of the
ICFAI University with a view to assist the students in their studies. And, they may not be taken as
the only answers for the questions given.
Model Question Paper I
Total Points: 100
27
-4
Part A: Basic Concepts (40 Points)
ef
.N
o.
Time: 3 Hours
02
Answer all the questions. Each question carries one point.
What is the fundamental difference between macroeconomics and microeconomics?
31
4-
1.
Macroeconomics involves studying the economy as a whole, while microeconomics

involves studying the behavior of individual industries, firms and households.
b.
Macroeconomics concentrates on those parts of the economy involving very large

amounts of money, while microeconomics concentrates on those parts of the economy
involving small sums of money.
c.
Macroeconomics studies the behavior of large firms, while microeconomics studies the
behavior of small firms.
d.
There is no difference, basically macroeconomics and microeconomics are one and the
same.
e.
Microeconomics involves studying the economy as a whole, while macroeconomics

Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
a.
Which of the following cannot be identified as a basic trend of economic development?
ve
rs
i
ty
2.
Population has grown less rapidly than the growth of the capital stock.
b.
There has been a strong upward trend in real wage rates.
iU
fa
Ic
The percentage of GDP used to finance investment in physical capital has been roughly
constant.
d.
The rate of profit has been gradually but steadily declining.
e.
Per capita income has increased by 4% during the last 5 years.
20
04
Th
e
c.
ni
a.
3.
Personal income taxes are examples of

a.
Fiscal policy instruments
b.
Monetary policy instruments
c.
Trade policy instruments
d.
Income policy instruments
e.
Wage policy instruments.
Macroeconomics
4.
Positive price inflation necessarily means that

All prices are increasing at the same time
b.
Prices are climbing but wages are not
c.
Though some prices may be falling, prices are, on the average, climbing
d.
The associated rate of unemployment is rising
e.
Interest rate is rising.
The sum of wages, rent, interest and profit
d.
All of the above
e.
None of the above.
04
c.
20
The sum of the receipts of economic resources
04
b.
Aggregate consumption
M
AC
a.
ef
.N
If potential GDP is greater than actual GDP, then

Exports must be greater than imports
b.
Inflation has increased from the year before
c.
There is probably some unemployment in the country
d.
Comparisons should be made in nominal terms
e.
Production is less than it could be if all resources were fully employed.
:8
1-
31
4-
02
27
-4
a.
BN
6.
04
In a model in which there is no government, net investment, capital replacement or

international trade, the market value of final output equals
o.
5.
a.
lr
ig
ht
re
se
rv
ed
.IS
7. A reduction in the money supply

a. Lowers interest rates now and in the future
b. May eventually lower interest rates if it makes price inflation subside
c. Increases the interest rate in the short run
d. Tends to be offset by an equivalent drop in aggregate demand
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
8. NDP does not include

a. Payments of corporate taxes
b. Net factor income from abroad
c. Undistributed profits
d. Net exports
e. The value added from intermediate goods.
Ic
fa
9. The value of existing houses bought in a particular period is

Included in GNP but not GDP
b.
Included in GDP but not GNP
c.
Included in both GDP and GNP
d.
Sometimes included in GNP but never in GDP
e.
Neither included in GDP nor GNP.
20
04
Th
e
a.
10. Saving is performed
318
a.
By individuals, separately and collectively, for a variety of reasons
b.
To facilitate the formation of new capital
c.
By government, in the form of a budget deficit
d.
When an individuals MPS is greater than one
e.
When consumption is less than income.
Part III
11. The investment demand curve depicts the relationship between

a.
Consumption and savings
b.
Investment and consumption
c.
Investment and interest rates
d.
Consumption and interest rates
e.
Savings and investment rates.
04
12. On the basis of the Keynesian model of output determination, which of the following will
most likely result if maintainable savings exceed intended investment?
Output will fall.
b.
Output will remain the same.
c.
Output will rise.
d.
Prices will rise and inventories will accumulate.
e.
Savings will increase.
13. A reduction in the legal required reserve ratio will tend to
ef
.N
o.
M
AC
04
20
04
a.
Reduce the money supply and reduce commercial bank loans
b.
Reduce the money supply and increase commercial bank loans
c.
Increase the money supply and increase commercial bank loans
d.
Increase the money supply and decrease commercial bank loans
e.
Leave the money supply unaffected.
BN
ed
.IS
:8
1-
31
4-
02
27
-4
a.
Equals the nominal rate plus the rate of inflation
b.
Equals the rate of inflation minus the nominal rate
c.
Equals the nominal rate minus the rate of inflation
d.
Tends to increase when inflation rises
e.
Is more relevant to investors than consumers.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
15. Personal income equals disposable income plus

b.
Residual wages
c.
Transfer payments
Ic
fa
iU
ni
a.
Dividend payments
e.
Personal savings.
20
04
Th
e
d.
16. In the inventory theory the transaction demand for money

a.
Varies positively with income but less than proportionately
b.
Varies inversely with the rate of interest and is proportional to the square root of income
c.
Varies positively with income but more than proportionately
d.
Varies inversely with income and interest rates
e.
None of the above.
319
Macroeconomics
17. Which of the following are the sources of change in high-powered money in Indian economy?
Change in RBI credit to government.
ii.
Change in RBI credit to banks.
iii.
Change in RBI credit to commercial sector.
iv.
Change in net foreign exchange assets of RBI.
v.
Change in net non-monetary liabilities.
a.
b.
Both (i) and (iii) above.
c.
d.
e.
All of (i), (ii), (iii), (iv) and (v) above.
M
AC
04
20
04
04
i.
o.
18. Average Propensity to Consume (APC) is the ratio of

Consumption to income
b.
Consumption to disposable income
c.
Consumption to savings
d.
Consumption to household investment
e.
Rate of change in consumption to rate of change in income.
:8
1-
31
4-
02
27
-4
ef
.N
a.
BN
MPC is the ratio of total consumption to total income and APC is the ratio of
incremental consumption to incremental income.
b.
APC is the ratio of total consumption to total income and MPC is the ratio of
c.
APC is the ratio of total consumption to total income and MPC is the ratio of
incremental consumption to incremental disposable income.
d.
MPC is the ratio of total consumption to total income and APC is the ratio of
incremental consumption to incremental disposable income.
e.
APC is the ratio of total consumption to total savings and MPC is the ratio of
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
a.
20
04
Th
e
i.
Ic
fa
20. Which of the following factors will affect the aggregate demand curve?
320
Change in income.
ii.
Change in business expectation.
iii.
Change in expected rate of inflation.
iv.
Change in cost of production.
a.
b.
c.
Only (ii), (iii) and (iv) above.
d.
Only (i), (iii) and (iv) above.
e.
Part III
21. Increase in real stock of money will shift the

a.
LM curve towards right
b.
LM curve towards left
c.
IS curve towards right
d.
IS curve towards left
e.
None of the above.
LM curve towards left and AD curve towards right
c.
IS curve towards left and AD curve towards right
d.
IS curve towards right and AD curve towards right
e.
LM curve towards left and IS curve towards right.
04
b.
20
LM curve towards right and AD curve towards left
o.
M
AC
04
a.
04
22. Fiscal expansion policy in the economy will shift
ef
.N
23. Which of the following statements are true?
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax.
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad.
iii.
GNP at market prices = GNP at factor cost + Indirect taxes Subsidies.
iv.
GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.
a.
b.
Both (i), (ii) and (iii) above.
c.
d.
Only (ii), (iii) and (iv) above.
e.
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
i.
s.
Al
lr
24. Which of the following statements is true regarding the personal disposable income?
It is equal to Wages and salaries + Dividends paid at home + Factor income received
from abroad + Transfers from government Personal income tax.
b.
It is equal to Wages and salaries + Dividends paid abroad + Factor income received
from abroad + Transfers from government Personal income tax.
c.
from abroad + Transfers from government.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
from abroad + Corporate tax.
e.
It is equal to Wages and salaries + Dividends paid abroad + Transfers from government
Personal income tax.
20
04
Th
e
d.
25. NNP at market prices is equal to

a.
GNP at factor cost Depreciation
b.
GNP at market prices Depreciation
c.
NNP at market prices Net factor income from abroad
d.
GNP at factor cost + Indirect taxes Net income from abroad
e.
NDP at factor cost + Depreciation.
321
Macroeconomics
26. Laffer curve shows the relationship between

a.
Price level and unemployment
b.
Tax rates and tax revenue
c.
Interest rate and income level
d.
Income and money supply
e.
Demand for money and supply of money.
27. When there is an equal decrease in taxes and the government spending,
The income level will fall by the change in the government expenditure but the level of
consumption and investment remains the same
b.
The income level will fall but the level of consumption will increase
c.
The income level will fall but level of investment will increase
d.
The income level will fall but the level of investment will decrease
e.
The income level will fall but the level of consumption and investment will increase.
ef
.N
o.
M
AC
04
20
04
04
a.
28. Bottlenecks in the context of macroeconomics refer to

Inadequate spending in a sector of the economy
b.
Shortage of materials at full employment
c.
Inadequate supply of labor at full employment economy
d.
Inadequate supply of specific resources in an economy below full employment
e.
BN
:8
1-
31
4-
02
27
-4
a.
ed
.IS
29. Quantitative Economics means
The economic model which uses the quantitative methods
b.
It is an alternative term from macroeconomics
c.
The economic model which takes exogenous variables
d.
The economic model which uses price elasticity
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
30. Marginal propensity of import is the

Change in imports as a result of a unit of change of income
b.
Change in imports as a result of a change in exports
c.
Percentage change in imports as a results of percentage change in production
Ic
fa
iU
ni
a.
Change in imports as a result of change in GDP
e.
Percentage change in imports due to percentage change in consumption.
20
04
Th
e
d.
31. The value-added approach to GDP measurement
322
a.
Adds up the difference between the value of output and costs of intermediate goods
b.
Adds up all income received by the household sector in the economy
c.
Removes the effect of inflation from the nominal GDP
d.
Adds up all the expenditures incurred on the goods and services produced by the
domestic sector
e.
Adds the total money value of goods and services purchased by their ultimate
buyers.
Part III

When the price level increases, nominal GDP increases even if no additional goods and
services are produced.
b.
Personal disposable income is either consumed or paid as taxes.
c.
Net investment equals gross investment less depreciation.
d.
The higher the interest rate, the higher will be the opportunity cost of holding money.
e.
When the value of goods imported exceeds the value of goods exported, the country
faces a trade deficit.
04
a.
20
04
33. The Coefficient of Acceleration is

Slope of the Consumption Function
b.
Capital Output Ratio
c.
Marginal Propensity to Consume
d.
Reciprocal of Marginal Propensity to Import
e.
None of the above.
ef
.N
o.
M
AC
04
a.
27
-4
34. The slope of the consumption function represents

Average Propensity to Save
b.
Marginal Propensity to Consume
c.
Marginal Propensity to Save
d.
Average Propensity to Consume
e.
None of the above.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
re
35. Which of the following is not a transfer payment?

Invalidity benefit.
b.
Flood relief.
c.
Government pensions.
d.
Salaries paid to Members of Parliament.
e.
Scholarships.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
ni
36. According to the classical economists, the Aggregate Supply Curve is

Vertical
Horizontal
20
04
Th
e
Ic
b.
fa
iU
a.
c.
First horizontal and then vertical
d.
First vertical and then horizontal
e.
Positively sloped.
37. Which of the following is not a component of aggregate expenditure in an economy?

a.
Consumption.
b.
Investment.
c.
Government purchases.
d.
Net exports.
e.
Taxes.
323
Macroeconomics
38. In which sector of Indian economy do we find a high rate of disguised unemployment?
a.
Service sector.
b.
Transport sector.
c.
Agriculture sector.
d.
Manufacture sector.
e.
Mining sector.
39. Which of the following is included in GDP of a country?

The sale of a used car.
b.
The sale of an old house.
c.
The sale of stocks and bonds.
d.
The fee paid to a broker for selling a stock.
e.
None of the above.
o.
M
AC
04
20
04
04
a.
b.
c.
d.
e.
Perfect unemployment.
BN
:8
1-
31
4-
02
27
-4
a.
ef
.N
40. Imperfect information about the labor market leads to
ed
.IS
Part B: Problems (60 Points)
se
rv
Solve all the problems. Points are indicated against each problem.
ht
re
41. The following information is available from National Income Accounts of a country:
lr
ig
Particulars
900
Factor Income Paid Abroad
500
400
ty
Indirect Taxes
ni
Factor Income Received From Abroad
20
04
Th
e
Ic
fa
iU
Subsidies
10,000
ve
rs
i
Pr
es
s.
Al
Gross National Product at Market Prices
MUC
Gross Corporate Profits
300
1,700
350
Net Corporate Profits
1,100
The Net National Product of the country at factor cost is

a.
8,700 MUC
b.
8,800 MUC
c.
8,900 MUC
d.
9,000 MUC
e.
9,100 MUC.
(2 points)
324
Part III
42. The following information is extracted from the balance sheet of a Central Bank.
04
20
04
Net Worth
Credit to Commercial Sector
Government Deposits
Credit to Banks
Net Foreign Exchange Assets
Other Non-monetary Liabilities
Other Deposits with the Central Bank
Other Assets
04
Million Units
of Currency
6,000
10,000
5,000
150
4,000
9,000
3,000
50
100
Particulars
M
AC
The Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated
to be 20 percent. Government money is 1,050. What is the money supply in the economy?
80,000 MUC.
b.
75,000 MUC.
c.
78,000 MUC.
d.
72,000 MUC.
e.
None of the above.
4-
02
27
-4
ef
.N
o.
a.
(3 points)
12.00%.
re
11.89%.
d.
e.
ht
11.45%.
ig
c.
lr
10.23%.
s.
Al
b.
Pr
es
10.77%.
ve
rs
i
ty
a.
se
rv
ed
.IS
BN
:8
1-
31
43. The current money supply and high powered money in the economy are 80,000 MUC and
20,000 MUC respectively. The currency deposit ratio is estimated to be 20 percent. At
present, the reserve ratio imposed by the central bank is 0.10. What would the required
reserve ratio if the Central Bank would like to sterilize the effect of an inflow of foreign
exchange to the extent of US $10 million. Current exchange rate is 50 units of local currency
to one US $?
(3 points)
iU
ni
44. The following items are taken from the Union Budget for the year 2001- 2002.
20
04
Th
e
Ic
fa
Tax Revenue (Net)

Non-Plan Expenditure:
On Revenue Account (which includes interest payments of Rs.1,12,300 crore)
On Capital Account
Plan Expenditure
On Capital Account
The fiscal deficit and primary deficit of the government are
a. Rs.1,16,314 crore and Rs.3,910 crore
b. Rs.1,06,783 crore and Rs.3,910 crore
c. Rs.1,16,314 crore and Rs.4,014 crore
d. Rs.1,06,783 crore and Rs.4,014 crore
Rs. crore
1,63,031
1,16,314
2,50,341
24,782
95,100
34,875
(2 points)
325
Macroeconomics
45. For an economy the Incremental Capital Output Ratio (ICOR) is estimated to be 4.0 and
expected savings-income ratio for the next year is 0.24. If the growth rate of population for
the next year is 3 percent, what is the expected growth rate in per capita income?
a.
2.91%.
b.
3.23%.
c.
2.41%.
d.
2.03%.
e.
None of the above.
04
04
(2 points)
: YT+R
Transfer Payments R
: 40
Tax Function (T)
: 0.2Y
Private Investment Function (I)
: 500 15i
ef
.N
-4
( )
o.
Disposable Income (Y )
: 25 + 0.25 Yd
d
M
AC
Savings Function (S)
04
20
46. The following relations are derived for an economy. (All macro aggregates are in million
units of currency and interest in terms of percent per annum).
27
( )
4-
: 400
31
Import Function (M)
02
Exogenous Government Expenditure G
1-
()
BN
:8
Export Function E
: 225
: 0.25Y
se
rv
ed
.IS
M
Transaction Demand for Money t
P
: 10 + 0.10 Y
: 125 50i
ig
ht
re
M
Speculative Demand for Money a
P
Pr
es
s.
Al
lr
M
Money Supply s
P
: 250
fa
iU
ni
ve
rs
i
20 MUC
25 MUC
30 MUC
35 MUC
40 MUC.
(3 points)
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ty
At equilibrium, the budget deficit of the economy is
47. The IS and LM functions of a hypothetical economy are 0.5Y = 1170 15i and Y = 500 + 200i.
If the exogenous government expenditure is increased by 345 MUC, the crowding out of
private investment in the economy will be
a.
b.
c.
d.
e.
40 MUC
45 MUC
50 MUC
55 MUC
60 MUC.
(3 points)
326
Part III
48. The following relations are derived for an economy. (All macro aggregates are in million
(S)
400 + 0.40 Yd + 20i
Transfer payments
(R)
200
Tax function
(T)
0.25Y
(I)
250 + 0.15 Y 75i
(G )
680
Import function
(M) 100 + 0.10 Y
Exports
(E )
04
Savings function
20
04
450
ef
.N
o.
M
AC
04
LM function (Money market equilibrium)

Y = 2,500 + 250i
Currently, the government is facing a budget deficit of 170 MUC. Owing to the downtrend in
the economy, the government increases its expenditure by 78.5 MUC. If the government
desires to maintain the budget deficit at the same level as earlier in spite of the increase in
exogenous government expenditure and adjusts the tax rate accordingly, what is the new
equilibrium tax rate?
33.20%.
b.
27.30%.
c.
30.55%.
d.
28.95%.
e.
None of the above.
:8
1-
31
4-
02
27
-4
a.
BN
(3 points)
re
se
rv
ed
.IS
49. The following information is extracted from the budget of union government. Find out the
revenue deficit of the government.
ig
ht
Tax Revenue (Net)
Rs. crore
1,63,031
68,714
Recoveries of Loans
15,164
Pr
es
s.
Al
lr
Non Tax Revenue
1,16,314
ve
rs
i
ty
On Revenue Account (which includes interest

payments of Rs.1,12,300 crore)
2,50,341
On Capital Account
24,782
Plan Expenditure:
95,100
On Revenue Account
60,225
On Capital Account
34,875
20
04
Th
e
Ic
fa
iU
ni
Non-Plan Expenditure:
a.
b.
c.
d.
e.
Rs.75,023 crore
Rs.78,821 crore
Rs.82,034 crore
Rs.83,032 crore
Rs.85,234 crore.
(2 points)
327
Macroeconomics
04

Dividends
Personal Tax Payments
Transfer Payments
GNP at Factor Cost
04
Million Units of
Currency (MUC)
1,700
350
1,100
250
450
50
9,400
Particulars
7,800 MUC
b.
7,850 MUC
c.
7,900 MUC
d.
7,950 MUC
e.
8,000 MUC.
ef
.N
o.
M
AC
04
a.
20
The income earned by the households in the country is
-4
(1 point)
02
27
31
1:8
BN
.IS
ed
s.
Al
lr
ig
ht
re
se
rv
Net Domestic Savings

Budget Deficit
Dividends
Personal Tax Payments
Personal Income
Million Units of
Currency (MUC)
1,600
100
1,700
350
1,100
250
450
8,000
4-
Particulars
b.
6,450 MUC
c.
6,550 MUC
d.
6,750 MUC
e.
None of the above.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
6,350 MUC
(3 points)
52. The money supply in a hypothetical economy is 350,000 MUC. The demand for money in
the economy is estimated to be Md = 410,000 15,000i. Because of the poor credit off-take
by the industrial sector, the Central Bank is considering lowering the interest rate by one
percentage point by buying government securities in the market. The volume of government
securities to be bought by the Central Bank to achieve the objective is (Assume multiplier to
be 5)
a. 2,000 MUC
b. 2,500 MUC
c. 3,000 MUC
d. 3,500 MUC
e. 4,000 MUC.
(2 points)
20
04
Pr
es
Out of total personal income, the personal consumption expenditure made is

a.
328
04
04
20

Consumption function (c)
= 250 + 0.75Y
= 65 + 0.15Y
Exports (E)
= 125
Import function (M)
= 0.15Y
If exports increase by 25 MUC, what will be the change in equilibrium level of income?
a. 100 MUC.
b. 125 MUC.
c. 150 MUC.
d. 175 MUC.
e. 200 MUC.
04
Part III
M
AC
o.
ef
.N
R
-4
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
54. In a hypothetical economy

Consumption (c)
= 500
Investment (I)
= 150
Exports
= 80
Imports
= 60
Money supply
(Ms) = 162
Given the data, what is the velocity of money in the economy?
a. 4.
b. 5.
c. 6.
d. 7.
e. 8.
(2 points)
re
(1 point)
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
55. In an economy monetary liabilities of the Central Bank is Rs.10,000 and government money
is Rs.2,000. If the currency-deposit ratio is known to be 0.33 and the Central Banks money
supply target is Rs.45,000, what will be the reserve ratio imposed by the Central Bank?
a. 0.025.
b. 0.010.
c. 0.037.
d. 0.005.
e. 0.018.
(1 point)
20
04
Th
e
56. The followings relations are derived for an economy. (All macro aggregates are in million
Savings function
(S)
400 + 0.20 Yd + 20i
Transfer payments
(R )
Tax function
(T)
(I)
0.25Y
250 + 0.30 Y 80i
(G)
600
Import function
(M)
100 + 0.10 Y
Exports
(E)
Real demand for money

Money supply
Md
Ms
100
450
0.2Y + 50 20i
410
329
Macroeconomics
To stimulate the economy the government increased its expenditure by 100. If the
government wants to maintain the budgetary surplus/deficit at the previous level, what should
be the new tax rate?
a.
25.00%.
b.
24.30%.
c.
28.45%.
d.
27.65%.
e.
28.25%.
04
04
(4 points)
04
0.80
0.30
Financial Interrelation Ratio 1.25
ef
.N
o.
If the secondary issues are 15,000, the New Issue Ratio for the economy is
M
AC
Finance Ratio
20
57. Following are the financial ratios for an economy:
0.55
b.
0.60
c.
0.65
d.
0.70
e.
0.75.
BN
:8
1-
31
4-
02
27
-4
a.
(2 points)
lr
ig
Rs.2,000cr.
Rs.200 cr.
Rs.542cr.
Rs.2,292 cr.
se
rv
re
=
=
=
=
ht
GDP at factor cost

Indirect taxes
ed
.IS
58. From the following information, compute subsidies
Rs.50 cr
b.
Rs.342 cr
c.
Rs.450 cr
d.
Rs.292 cr
e.
Rs.742 cr.
(1 point)
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
59. In an economy, the exogenous investment is 50, government spending is 100 MUC and
autonomous consumption is 50 MUC. The net export function is 100 0.1Y and disposable
income (Yd) is Y T. If an increase in autonomous investment by 40 leads to an increase in
equilibrium income and consumption by 100 MUC and 80 MUC respectively, what would be
the new equilibrium income for the economy?
a.
320 MUC.
b.
500 MUC.
c.
800 MUC.
d.
850 MUC.
e.
None of the above.

(2 points)
330
Part III
60. The following consumption function has been estimated for an economy:
Ct = 10 + 0.7Ydt + 0.3Ct-1
b.
70 MUC.
c.
30 MUC.
d.
100 MUC.
e.
143 MUC.
04
10 MUC.
20
a.
04
Where Ct and Ct-1 denote consumption in periods t and t-1 respectively and Ydt is the
disposable income in period t. If Ydt increases from 200 MUC to 300 MUC and remains
there indefinitely, what could be the change in the steady state level of consumption?
04
(2 points)
M
AC
61. In a two sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous
investment is equal to 22 MUC. The equilibrium level of income in the economy is
21 MUC
b.
30 MUC
c.
43 MUC
d.
100 MUC
e.
None of the above.
(1 point)
31
4-
02
27
-4
ef
.N
o.
a.
e.
51% of GDP.
.IS
45% of GDP.
ed
d.
se
rv
21% of GDP.
re
c.
14% of GDP.
ht
b.
ig
10% of GDP.
s.
Al
lr
a.
BN
:8
1-
62. In an economy, the incremental capital output ratio is 5 and the expected population growth
rate is 3% per annum. What is the required investment, if the targeted per capita real GDP
growth rate is 6%?
(2 points)
Pr
es
Answer Questions 63-65 based on the following information:
ve
rs
i
ty
Balance of payments of a country for the year 2002
20
04
Th
e
Ic
fa
iU
ni
Particulars
Merchandise imports
Merchandise exports
Software exports
Software imports
Earnings on loans and investments abroad
Earnings on loans and investments in the country by foreigners
Private remittances to abroad
Private remittances from abroad
Government loans to abroad
Government loans from abroad
Direct investments abroad
Foreign direct investment in the country
Short-term loans and investments abroad
Foreign short-term loans and investments in the country
MUC
20,000
18,000
16,000
12,000
400
1,000
200
150
30
20
10
150
200
40
331
Macroeconomics
63. The Balance of Trade (BoT) for the year 2002 is

a. 2,000 MUC (deficit)
b. 2,000 MUC (surplus)
c. 1,000 MUC (surplus)
d. 1,350 MUC (surplus)
e. 1,950 MUC (surplus).
(1 point)
04
20
04
B
W
M
AC
4-
02
27
-4
ef
.N
o.
(2 points)
(2 points)
:8
1-
31
65. What is the capital account balance for the year 2002?
a. 30 MUC (Dr.).
b. 30 MUC (Cr.).
c. 570 MUC (Dr.).
d. 630 MUC (Cr.).
e. 1,350 MUC (Cr.).
04
64. What is the current account balance for the year 2002?
a. 1,350 MUC (Cr.).
b. 1,950 MUC (Cr.).
c. 1,650 MUC (Dr.).
d. 1,350 MUC (Dr.).
e. 2,000 MUC (Dr.).
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
66. Marginal Propensity to Consume (MPC) for an economy is estimated to be 0.75. Beginning
from a position of equilibrium, investment rises by Rs.100 crore. The change in Y that will
bring the economy back to equilibrium is
a. Rs.75 crore
b. Rs.133 crore
c. Rs.300 crore
d. Rs.400 crore
e. Rs.100 crore.
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
67. The LM function is Y = 500 + 20i. Which of the following combinations of interest and
income does not represent an equilibrium in the money market?
a. i = 2% and Y = 460.
b. i = 5% and Y = 600.
c. i = 7% and Y = 640.
d. i = 10% and Y = 700.
e. i = 4% and Y = 580.
(1 point)
68. The Marginal Propensity to Consume (MPC) is 0.70 and the proportional tax rate is 28.5%.
Following the economic recovery, the government of the country decided to cut down its
expenditure by 250 MUC. What could be the change in budgetary surplus, if the government
proceeds with its plans?
a. 107.5 MUC.
b. 175.0 MUC.
c. 250.0 MUC.
d. 142.5 MUC.
e. 500.0 MUC.
(2 points)
332
Part III
69. The following data is taken from balance sheet of a Central Bank.
Particulars
MUC
Net worth
6,000
10,000
5,000
150
Credit to banks
4,000
3,000
50
04
Other deposits with the central bank
04
Government deposits
o.
ef
.N
9,000 MUC
9,750 MUC
d.
10,050 MUC
e.
10,000 MUC.
c.
-4
b.
27
8,500 MUC
31
4-
02
a.
M
AC
04
20
Other assets
100
The Government money in the economy is 1050 MUC and Money supply in the economy is
80,000 MUC. If Central Bank imposes a reserve ratio of 10 percent and the currency deposit
ratio is estimated to be 20 percent, net foreign exchange assets with the Central Bank are
(3 points)
800 MUC.
ed
e.
se
rv
750 MUC
re
d.
700 MUC
ht
550 MUC
c.
ig
b.
lr
200 MUC
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
.IS
BN
:8
1-
70. In an economy, transaction demand for money is 500 MUC. The speculative demand for
money is estimated to be 250-5i. If Central Bank of the country aims at an interest rate (i) of
10 percent, money supply should be
333
Model Question Paper I

Suggested Answers
Part A: Basic Concepts
1. (a) Macroeconomics involves studying of economy as a whole, while microeconomics
04
2. (d) Rate of profit is not a measure of economic development.
04
20
04
3. (a) Policies that are related to collection of taxes and government spending constitute the
fiscal policy of a government. Personal income tax is an instrument of fiscal policy.
M
AC
4. (c) Inflation refers to rise in general level of price. Positive price inflation refer to a situation
where although some prices may be falling, prices are, on the average climbing.
ef
.N
o.
5. (c) In a model in which there is no government, net investment, capital replacement or

international trade, the market value of final output equals the sum of wages, rent, interest and
profit.
31
4-
02
27
-4
6. (e) Potential GDP is the maximum feasible GDP of an economy when all the resources are
fully employed. If potential GDP is more than actual GDP, then production is less than it
could be if all resources were fully employed.
.IS
BN
:8
1-
7. (b) A reduction in money supply eventually lower interest rates if it makes price inflation
subside. However, if it is not able to subside inflation, soon the interest rates will go up in the
market.
se
rv
ed
8. (b) Net (Gross) Domestic Product = Net (Gross) National Product NFIA. This implies that
net domestic product does not include net factor income from abroad.
ig
ht
re
9. (e) Because the purchase of existing house is not an addition to the capital stock, the value of
existing house is not added to GDP or GNP of an economy.
s.
Al
lr
10. (a) Savings is done by individuals, separately and collectively, for various reasons.
ty
Pr
es
11. (c) Investment demand curve (or investment spending curve or IS curve) depicts the relation
between investment spending and interest rates in the goods market.
ni
ve
rs
i
12. (a) On the basis of the Keynesian model of output determination, if maintainable savings
exceed intended investment, output will fall.
Th
e
Ic
fa
iU
13. (c) A reduction in the reserve ratio increases the credit creating and lending capacity of the
commercial banks, which in turn lead to increase in money supply in the economy.
20
04
14. (c) Real interest rate = Nominal interest rate Rate of inflation.
15. (a) Personal disposable income = Personal income Personal income taxes. Hence, Personal
income = Personal disposable income + Personal income taxes.
16. (b) According to the inventory theory, the transaction demand for money varies inversely
with the rate of interest and is proportional to the square root of income.
17. (e) The high powered money in Indian economy will change due to all the five sources.
18. (a) Average propensity to consume is the ratio of change in consumption to total income.
19. (b) Whereas average propensity to consume (APC) is the ratio of total consumption to total
income, marginal propensity to consume is the ratio of incremental consumption to
incremental income.
Part III
20. (b) Following are some of the important factors that are responsible for changes in aggregate
demand.
Change in income
Rate of interest
Government policy
Change in the exchange rate
Change in the expected rate of inflation.
Change in business expectations.
04
04
21. (a) Any increase in real stock of money will shift the LM curve to words right.
M
AC
04
20
22. (d) Fiscal policy affects AD demand directly. For example, increase in government spending
increases the aggregate demand in the economy, which tend to increase the output at each level of
interest rate. Thus the IS curve shifts out and to the right for an increase in government
expenditure.
ef
.N
o.
23. (e) The following statements are true.
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad
iii.
GNP at market prices = GNP at factor cost + Indirect taxes Subsidies
iv.
GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.
31
4-
02
27
-4
i.
:8
1-
24. (a) Personal income = Wages and salaries + Dividends + Transfer payments; and
ed
.IS
BN
Personal Disposable Income = Personal income Personal income taxes. Thus, personal
disposable income is equal to wages and salaries + Dividends paid at home + Factor income
received from abroad + Transfers from government Personal income taxes.
re
se
rv
25. (b) NNP at market (factor) prices = GNP at market (factor) prices Depreciation.
ht
26. (b) Laffer curve shows the relationship between tax rates and tax revenue.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
27. (b) Decrease in taxes increases the disposable income and hence increases the consumption
by MPC times the increase in disposable income. Decrease in government expenditure
decreases the income by the same amount. Since level of increase in income due to decrease
in taxes is less than that of level of decrease in income due to reduction in government
spending, the income level will fall. However, due to increase in disposable income level of
consumption will increase.
Th
e
Ic
fa
iU
28. (e) Bottlenecks refer to the blockages in the achievement of full employment in the
economy. Shortage of materials and inadequate supply of labor act as bottlenecks in the
process of achieving full employment.
20
04
29. (b) Macroeconomics is sometimes known as quantitative economics.

30. (a) Marginal propensity of import is the change in the level of imports as a result of a unit
change of income. In other words, marginal propensity to import is the percentage change
in the level of imports due to a percentage change in income.
31. (a) (a) Value addition is equal to value of output less value of inputs. By summing up all
the value additions in the economy GDP of the economy can be computed, which is
called value added approach to measuring GDP. Hence the answer is (a).
(b) By adding all the incomes of factors of production in the economy, GDP can be
computed which is called income approach to measuring GDP. Hence (b) is not the
answer.
335
Macroeconomics
(c)
Is not the answer as we get real GDP by removing the effect of inflation from nominal
GDP.
(d & e) Is not the answer as we get GDP through expenditure approach by summing up all
the expenditures incurred by the ultimate buyers on the goods and services produced
by the domestic sector.
True. Nominal GDP can increase both on account of increase in real production or
an increase in the price level.
(b) False. Disposable income is equal to personal income less personal tax payments.
Disposable income is either used for consumption expenditure or saving.
(c) True. Net investment is equal to gross investment less depreciation.
(d) True. The opportunity cost of holding money is the rate of interest foregone by
holding the money. Therefore, as the rate of interest increase, opportunity cost of
holding money also increases.
(e) True. Trade balance is in deficit if import are greater than export of goods.
M
AC
04
20
04
04
32. (b) (a)
Is not the answer. Slope of consumption function is Marginal Propensity to

Consume.
o.
33. (b) (a)
ef
.N
(b) Is the answer. Coefficient of acceleration is equal to K/Y, which is called

Capital Output Ratio.
31
4-
02
27
-4
(c) Is not the answer. Marginal Propensity to Consume is equal to C/Y.

(d) Is not the answer. Reciprocal of Marginal Propensity to Import is equal to
Y/Imports.
se
rv
ed
.IS
BN
:8
1-
34. (b) Consumption function captures the relation between the consumption and the disposable
income. Slope of consumption function indicates how responsive consumption is as income
changes. That is, slope of the consumption function is equal to C/Y, which is nothing but
Marginal Propensity to Consume.
(a) Is not the answer. Average Propensity to Save is equal to S/Yd.
re
(b) Is the answer. Marginal Propensity to Consume is equal to C/Yd.
s.
Al
lr
ig
ht
(c) Is not the answer. Marginal Propensity to Save is equal to S/Yd.

(d) Is not the answer. Average Propensity to Consume is equal to C/Yd.
ni
ve
rs
i
ty
Pr
es
35. (d) Transfer payments are payments which cannot be regarded as payment for current
services or production and therefore do not enter national income. Of the above, invalidity
benefit, flood relief, government pensions and Scholarships do not involve any production
activity and are transfer payments. Where as, salaries paid to Members of Parliament are
compensation to the services rendered by the members, hence it is not a transfer payment.
20
04
Th
e
Ic
fa
iU
36. (a) (a) Classical economists assume flexible wages in the economy. Flexibility of wages
results in full employment of labor in the economy. Hence the aggregate supply curve
becomes vertical at the full employment level. Therefore, the answer is (a).
(b) Is not the answer. If Aggregate Supply curve is horizontal, increase in the Aggregate
Demand does not exert pressure on the price level and more goods and services are
supplied at the same price level. This can happen only if there is very high level of
unemployed resources in the economy. But, classical economists assume full
employment of resources.
(c)
If Aggregate Supply curve is first horizontal and then vertical, it implies Aggregate Supply is
perfectly elastic until the full employment level is reached and perfectly inelastic at the full
employment level of output. Hence, (c) is not the answer.
(d) Is not the answer. Aggregate Supply curve with such a shape does not exist.
(e)
336
Is not the answer. A positively sloped Aggregate Supply curve is not possible under the
classical assumption of perfectly flexible wages.
Part III
37. (e) Aggregate expenditure in an economy consists of Consumption, Investment, Government

purchases and Net exports. Hence the answer is (e).
38. (c) Disguised unemployment is a situation where labor force is apparently employed but
Marginal Productivity of labor is either zero or negative. This situation is prevalent in Indian
agricultural sector.
39. (d) Payments related to productive activities undertaken by factors of production during the
year are included in the GDP of a country.
(a)
Not included since the car is not produced during the current year
04
Not included since sale of stocks and bonds are financial transactions only.
20
(c)
04
(b) Not included since the house is not constructed during the current year
04
(d) Is included in GDP as the fee is earned for rendering brokerage services and is an
income.
ef
.N
o.
M
AC
40. (c) Unemployment caused by imperfect information about the available jobs and skills in the
market is called frictional unemployment.
-4
Part B: Problems
02
27
41. (b)
a. GDPFC
31
4-
= GNPMP NFIA Net Indirect Taxes

= Factor Income Received from Abroad Factor Income Paid
Abroad
:8
1-
NFIA
.IS
BN
= 400 500 = 100 MUC
ed
Net Indirect Taxes = Indirect Taxes Subsidies
se
rv
= 900 300 = 600 MUC

GDPFC
re
= 10,000 (100) 600
ig
ht
= 9,500 MUC
b. NNPFC
= Gross Corporate Profits Net Corporate Profits
Pr
es
Depreciation
s.
Al
lr
= GDPFC Depreciation + NFIA
ve
rs
i
ty
= 1,700 1,100
= 9,500 600 + (100)
= 8,800 MUC.
Ic
fa
iU
ni
NNPFC
= 600 MUC
20
04
Th
e
42. (a) Money Supply in the Economy (Ms) = Money Multiplier (m) x High Powered Money (H)
m =
1 + Cu
1 + 0.20
1.2
=
=
=4
Cu + r 0.20 + 0.10 0.3
H = Monetary Liabilities of Central Bank + Government Money

Monetary Liabilities of Central Bank (ML) = Financial Assets + Other Assets Non-Monetary
Liabilities.
Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector +
Net Foreign Exchange Assets.
=
10,000 + 4,000 + 5,000 + 9,000
28,000 MUC
337
Macroeconomics
Non-Monetary Liabilities = Net Worth + Government Deposits + Other Non Monetary

Liabilities.
=
6,000 + 150 + 3,000
9,150 MUC.
28,000 9,150 + 100
18,950 MUC
18,950 + 1,050
20,000 MUC.
04
ML =
20
04
Money supply = 20,000 x 4
B
W
M
AC
o.
ef
.N
R
-4
New m
4-
Now, H
US $ 10 m
10 x 50 MUC
500 MUC
20,000 + 500
20,500
80,000
80,000
= 3.90
20,500
27
Ms Target
=
=
=
=
=
=
02
43. (a) Foreign Exchange Inflow
04
= 80,000 MUC.
3.90
1.20 (0.2 x 3.90)

1
(1.20 0.78)
3.90
0.10769
10.77%.
Borrowings and other liabilities

Rs.1,16,314 cr.
Fiscal Deficit Instant payments
Rs.(1,16,314 1,12,300) cr.
Rs.4,014 cr.
lr
=
=
=
=
=
ni
ve
rs
i
ty
Primary deficit
Pr
es
s.
Al
44. (c) Fiscal deficit
=
=
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
1.20

0.2 + r
3.90 r
Savings / Income ratio

ICOR
24
= 6%
4
(1 + g y )
1 x 100
(1 + g p )
1.06
1 x 100
1.03
2.91%.
20
04
Th
e
Ic
fa
iU
45. (a) Rate of Economic Growth (gy)
Growth rate in PCI

Where gp is growth rate in population
Growth rate in PCI
338
04
20
04
B
M
AC
46. (a) IS Function

Savings function = 25 + 0.25Yd
Hence, consumption function = 25 + 0.75Yd
Y
=
C+I+G+EM
Y
=
25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y)
Y
=
25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y
Y
=
1,170 0.5Y 15i
0.5Y
=
1,170 15i
Y
=
2,340 30i
..... IS function
LM Function
Ms
Mt
Ma
=
+
P
P
P
250
=
0.25Y + 125 50i
0.25Y =
125 + 50i
Y
=
500 + 200i LM function
04
Part III
Equating the IS and LM functions, we can get the equilibrium interest rate.
ef
.N
o.
Hence,
27
4-
02
1,840
= 8%
230
i =
1-
= 2,340 30i
:8
-4
= 1,840
31
230i
2,340 30i = 500 + 200i
BN
= 2,340 30(8)
ed
= 10 + 0.1Y
se
rv
.IS
= 2,340 240 = 2,100

= 10 + 0.1 (2,100)
s
ht
= 225
ig
re
= 10 + 210 = 220
s.
Al
lr
Hence, trade balance = 225 220 = 5 (surplus)

= 440
Pr
es
G + R = 400 + 40
= 0.2 x 2,100 = 420

= 440 420 = 20 MUC.
ve
rs
i
Budget deficit
ty
tY
Ic
fa
iU
ni
47. (b) Equating the IS and LM functions, we can get the equilibrium interest rate. If IS function
is 0.5Y = 1,170 15i, then Y = 2,340 30i.
20
04
Th
e
Hence, at equilibrium,
2,340 30i
230i
i
= 500 + 200i
= 1,840
=
1,840
= 8%
230
If the exogenous government expenditure increases by 345, the new IS function will be
0.5Y = 1,170 + 345 15i
0.5Y = 1,515 15i
Y = 3,030 30i
Hence, new interest rate (i) will be:
3,030 30i = 500 + 200i
339
Macroeconomics
230i = 2,530
2,530
= 11%
230
Investment function (I) = 500 15i
When i = 8%
I
= 500 (15 x 8) = 380
When i = 11%
I
= 500 (15 x 11) = 335
Crowding-out of private investment
= 380 335 = 45 MUC.
ed
1,405.4 95i
0.35
se
rv
re
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
20
04
B
M
AC
48. (e) If government intends to maintain the budget surplus at 170 MUC.
T (G + R) = 170
T
= (G + R) 170
= 758.5 + 200 170
= 788.5
Yd
= (Y T + R) = Y 588.5
C
= 400 + 0.60 (Y 588.5) 20i
= 46.9 + 0.60Y 20i.
IS function is
Y
= C + I + G + (E M)
= 46.90 + 0.60Y20i + 250 +0.15Y75i + 758.5 + 450 (100 + 0.10Y)
Y
= 1,405.4 + 0.65Y 95i
0.35Y = 1,405.4 95i
04
04
788.5
T
= 24.45%.
=
Y 3, 225.57
iU
ni
ve
rs
i
Tax rate (t) =
ty
Pr
es
s.
Al
lr
ig
ht
At Equilibrium, IS = LM
4015.43 271.43i = 2,500 + 250i
1515.43 = 521.43i
i = 2.91
Y = 3,225.57
20
04
Th
e
Ic
fa
49. (b) Revenue Deficit

= Revenue Expenditure Revenue Receipts
Revenue Expenditure
= Non-Plan Revenue Expenditures + Plan Revenue Expenditure
= 2,50,341 + 60,225
= Rs.3,10,566 cr.
Revenue Receipts
= Tax Revenue + Non-Tax Revenue
= 1,63,031 + 68,714
= Rs.2,31,745 cr.
Revenue Deficit = (3,10,566 2,31,745)
= Rs.78,821 cr.
340
Part III
04
ef
.N
o.
M
AC
04
20
51. (a) Personal Disposable Income (PDI) Personal Savings

PDI = Personal Income Personal Tax Payments
= 8,000 450
= 7,550 MUC.
Personal Savings
= Net Domestic Savings Retained Earnings + Budget Deficit
Retained Earnings
= Net Corporate Profits Corporate Profit Tax Dividends
= 1,100 350 250
= 500 MUC
Personal Savings
= 1,600 500 + 100
= 1,200 MUC
Personal consumption = 7,550 1,200
= 6,350 MUC.
04
50. (e) The income received by the households represented by the personal income of the
economy. Personal income = GNPFC Depreciation Net corporate profits + Dividends +
Transfer payments = 9,400 (1,700 1,100) 1,100 + 250 + 50 = 8,000 MUC.
BN
:8
1-
31
4-
02
27
-4
52. (c) At equilibrium, demand for money

(Md) = Supply of money (Ms).
4,10,000 15,000i
= 3,50,000
15,000i
= 60,000
i
= 4%.
If interest rate is to be decreased by one percentage point, equilibrium rate should be 3%.
If i
= 3%
Md
ed
se
rv
= 3,65,000.
.IS
= 4,10,000 (15,000 x 3)
To ensure equilibrium, Md = Ms.

Ms
ht
re
= 3,65,000.
lr
ig
Required change in the money supply
Pr
es
ve
rs
i
ty
Ms
s.
Al
= 3,65,000 3,50,000
= 15,000 MUC
=
M s
15,000
=
= 3,000 MUC
m
5
fa
iU
ni
If the Central Bank buy government securities worth 3,000 MUC, the equilibrium rate of
interest can be decreased by one percentage point.
20
04
Th
e
Ic
53. (a) Multiplier = 1/(1 MPC + MPV + MPI)

where,
MPC = Marginal Propensity to Consume,
MPV = Marginal Propensity to Invest and
MPI = Marginal Propensity to Import.
Thus, multiplier = 1/(1 0.75 + 0.15 0.15)
= 1/0.25 = 4.
Thus, if exports increase by 25, the income will increase by 4 x 25 = 100 MUC.
54. (b) Velocity of money = Y/Ms
Y = C + I + G + E M = 500 + 150 + 140 + 80 60
= 810
Thus, velocity of money = 810/162 = 5.
341
Macroeconomics
55. (a) Ms = [(1 + Cu)/(Cu + r)] x High-powered money

45,000 = 12,000 [(1 + 0.33)/(0.33 + r)]
3.75
= [1.33/(0.33 + r)]
or, r
= 0.025.
56. (e) Derivation of IS Function: At equilibrium, Y = AD

Y = C + I + G + NE = (400 + 0.8Yd 20i) + 250 + 0.3Y 80i + 600 + 450 100 0.1Y
Y = 400 + 0.8(Y 0.25Y + 100) 20i + 250
+ 0.3Y 80i + 1050 100 0.1Y
Y = 1680 + 0.8Y 100i
04
04
0.2Y = 1680 100i
04
20
Y = 8400 500i
Derivation of LM function: At equilibrium, real money demand = real money supply
M
AC
410 = 0.2Y + 50 20i

360 = 0.2Y 20i
ef
.N
o.
0.2Y = 360 + 20i
Y = 1800 + 100i
27
-4
Thus, at simultaneous equilibrium,
02
8400 500i = 1800 + 100i
31
4-
1320 = 120i
:8
1-
Or, i = 11
BN
And, Y = 8400 500 (11) = 2900
.IS
Budget surplus (deficit): Tax revenues Government expenditure Transfer payments
se
rv
ed
= 0.25(2900) 600 100 = 25
re
If government wants to maintain the same budget surplus even after the increase of
government expenditure, then
lr
ig
ht
Tax revenue (T) {New Government spending (G) + Transfer payments (R)} = 25
s.
Al
or, T = 25 + (600 + 100) + 100 = 825
Pr
es
And, Yd = Y 825 + 100 = Y 725
ty
Now, new IS function = C + I + G + NE = Y
ve
rs
i
Y = 400 + 0.8(Y 725) 20i + 250 + 0.3Y 80i + 700 + 450 100 0.1Y
iU
ni
or, Y = 1120 + Y 100i
fa
Or, 100i = 1120
20
04
Th
e
Ic
Or, i = 11.2
Coming to LM curve, there will not be any change in the equilibrium position of assets
market. Hence, LM function = 0.2Y = 360 + 20i = 360 + 20(11.2) = 584
or, Y = 2920
New Tax rate = T/Y = 825/2920 = 0.2825 or 28.25%.
57. (d) New issue ratio = New issues/Net capital formation

New issues = Secondary issues/Intermediation ratio
Net capital formation = Total issues/Financial interrelation ratio
For the year, new issues = 15000/0.8 = 18,750.
Net capital formation = (18750 + 15000)/1.25 = 27,000.
New issue ratio = 18,750/27,000 = 0.70.
342
Part III
04
20
04
B
W
M
AC
o.
ef
.N
59. (d) Marginal propensity to consume (MPC) = C/ Y = 80/100 = 0.8

Multiplier = Y/ I = 100/40 = 2.5
= 1/(1 MPC + MPC x t + MPI) = 1/(0.2 + 0.8t + 0.1) = 1/(0.3 + 0.8t)
Or, 2.5(0.3 + 0.8t) = 1
Or, 0.75 + 2t = 1
Or, 2t = 0.25
Or, t = 0.125 or 12.5%
At equilibrium,
Y = C + I + G + NE = {50 + 0.8(Y 0.125Y)}+ 50 + 140 + 100 0.1Y
Y = 340 + 0.7Y 0.1Y
Or, 0.4Y = 340
Or, Y = 850 MUC.
04
58. (c) GNPMP = GDPFC + NFIA + Indirect taxes Subsidies

2292 =
2000 + 200 + 542 X
X =
2292 +2200 + 542
=
Rs.450 cr.
02
27
-4
60. (d) At the steady state level of consumption, Ct = Ct-1

Given the equation, Ct = 10 + 0.7Ydt + 0.3Ct-1
1-
31
4-
Ct = 10 + 0.7Ydt + 0.3Ct since Ct = Ct-1

Or, 0.7Ct = 10 + 0.7Ydt
se
rv
re
s
Pr
es
s.
Al
lr
ig
ht
61. (d) C = 8 + 0.7Y

S = 8 + 0.3Y
At equilibrium, S = I
8 + 0.3Y = 22
0.3Y = 30
Y = 100 MUC.
ed
.IS
BN
:8
Or, Ct/ Ydt = 0.7/0.7 = 1

Thus, if Ydt increases by 100, then the steady state level of consumption also increases by
100 MUC.
ve
rs
i
ty
62. (d) Required nominal growth rate = Real GDP growth rate + Population growth rate
=
3% + 6% = 9%
20
04
Th
e
Ic
fa
iU
ni
Thus, investment requirement = Required nominal growth rate Incremental capital output ratio
= 9 x 5 = 45% of GDP.
Alternatively,
Per capita growth rate
= {(1 + gn)/(1 + gp) 1} x 100
Where,
gn = GDP growth rate and gp
= Population growth rate
0.06 = [{(1 + gn)/(1.03)} 1] 1.06 x 1.03
= 1 + gn
Or, gn = 0.0918 or 9.18%
Thus, the investment requirement = Required nominal growth rate Incremental capital output ratio
=
5 9.18% = 45.9% of GDP
45% of GDP.
343
Macroeconomics
63. (a) Balance of Trade (BoT) = Merchandise imports Merchandise exports

= 20,000 18,000 = 2,000 MUC (deficit).
64. (a) Current account balance = Merchandise exports Merchandise imports + Software
exports Software imports + Earnings on loans and investments abroad Earnings on loans
and investments by foreigners + Private remittances from abroad Private remittances to
abroad
= 18,000 20,000 + 16,000 12,000 + 400 1,000 + 150 200 = 1,350 MUC
Cr.
20
1
100
1 0.75
04
66. (d) Y=Multiplier I =
04
04
65. (a) [Government loan to abroad +direct investments abroad + short-term loan abroad]
[Government loan from abroad + FDI in the country + short-term loan in the country]
= (30 + 10 + 200) (20 + 150 + 40) = 30 MUC Dr.
M
AC
= Rs.400 crore.
67. (a) LM function Y = 500 + 20i
i = 4%,
Y = 500 + (20 4)
= 580
i = 2%,
Y = 500 + (20 2)
= 540
ef
.N
= 600
Y = 500 + (20 5)
-4
i = 5%,
27
= 640
02
Y = 500 + (20 7)
4-
i = 7%,
o.
= 700
31
i = 10%, Y = 500 + (20 10)
If,
se
rv
ed
= 1/(1 0.7 + 0.7 x 0.285) = 2
.IS
68. (a) Multiplier = 1/(1 MPC + MPC x t)
BN
:8
1-
(a) does not fall on the LM curve hence does not represent an equilibrium in the money
market.
Change in tax income = Tax rate (t) x Change in income (Y) = 2 x (-250) x 0.285 = 142.5
ht
re
Change in government expenditure (G) = 250
lr
ig
Change in budget deficit = 250 142.5 = 107.5 MUC.
s.
Al
69. (b) Money supply = High-powered money (H) x Money multiplier
Pr
es
80000 = H x {(1 + 0.2)/(0.2 + 0.1)}
ty
Or, H = 20,000 MUC
ve
rs
i
H = Monetary Liabilities of the Central Bank + Government money = ML + 1050
iU
ni
Or, ML = 20000 1050 = 18950.
Ic
fa
Total assets = Total liabilities (Non-Monetary Liabilities + Monetary Liabilities)
20
04
Th
e
Total liabilities = Net worth (6000)+ Government deposits (150) + Other non-monetary
liabilities (3000) + Monetary liabilities (18950) = 28100.
Thus, total assets = 28100 (10000 + 4000 + 5000 + 100 + Net foreign exchange assets)
Or, Net foreign exchange assets = 28100 19100 = 9,000 MUC.
70. (c) Transaction demand for money = 500

Speculation demand for money
= 250 (5 10) = 200
Demand for money = 500 + 200 = 700
Money supply = 700 MUC.
344
Model Question Paper II

Time: 3 Hours
Total Points: 100

o.
ef
.N
R
-4
27
Potential GDP is
02
3.
4-
Net factor income from abroad is equal to

a. GDP GNP
b. GNP GDP
c. GDP/GNP
d. GNP/GDP
:8
1-
31
2.
M
AC
04
20
04
04

1. An increase in the money supply
a. Must lower interest rates for all the time
b. Raises interest rates for all the time
c. Cannot affect the interest rate since it is a unit free pure number
d. Though it tends to lower interest rates at first, but may end up raising nominal interest
rates (by speeding up inflation)
e. Fiscal deficit will increase.
The total value of goods and services measured at current prices
b.
The total value of goods and services that could be produced at full employment
c.
The total value of goods and services measured at prices corrected for inflation
d.
The total value of goods and services net of government spending
e.
The total value of goods and services that could be produced at full efficiency.
ht
re
se
rv
ed
.IS
BN
a.
The study of macroeconomics includes, among other topics, which of the following?
lr
ig
4.
The sources of inflation, unemployment, economic growth.
b.
The foundations of aggregate behavior.
c.
The reasons, why some economies succeed and some fail.
d.
Policies that can be enacted to improve the likelihood of success in achieving

macroeconomic objectives.
e.
All of the above.
fa
In the Simple Keynesian multiplier model, national output moves up and down in response to
a. Movements in aggregate demand
b. Movements in aggregate supply
c. Changes in the general price level
d. Changes in the level of input prices
e. Changes in the time of day.
20
04
Th
e
Ic
5.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
6.
A price index is necessary if:

a. Nominal GDP is to be calculated
b. Nominal GDP is to be converted into real GDP
c. Profits are to equate the two accounting measures of GDP
d. Disposable income is to be converted to personal income
e. All the above statements are equally valid.
Macroeconomics
Suppose that people were suddenly to decide to save less of their disposable incomes. You
should expect to observe
a.
An increase in the marginal propensity to consume
b.
A reduction in the marginal propensity to consume
c.
An increase in the marginal propensity to save
d.
An increase in the sum of the marginal propensity to consume and the marginal
propensity to save
e.
An increase in the marginal propensity to consume and a corresponding increase in the

sum of the marginal propensity to consume and marginal propensity to save.
20
04
On the basis of the Keynesian model of output determination, GDP is in equilibrium

a.
Whenever there is full employment
b.
Only if marginal propensity to save equals marginal propensity to invest
c.
Whenever there is full employment without government interference
d.
Whenever the desired saving equals the desired investment
e.
Whenever actual saving equals actual investment.
ef
.N
o.
M
AC
8.
04
04
7.
27
-4
9. Which of the following statements is false?
Whatever else tax reductions do, the personal consumption resulting from tax
reductions must stimulate the real GDP.
b.
Tax reductions can cause inflation.
c.
Tax reductions tend to stimulate output.
d.
Tax reductions tend to increase consumption.
e.
Tax reductions tend to increase personal savings.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
lr
ig
ht
re
10. The resorting of the Central Bank to contractionary or expansionary monetary policies to
neutralize the change in money supply caused by changes in foreign exchange reserves is
referred to as
Transmission mechanism
b.
Sterilization
c.
Stabilization
d.
Monetary mechanism
e.
Exchange mechanism.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
The availability of inputs
Ic
Th
e
a.
fa
11. Aggregate supply in the economy depends upon

b.
The level of technology
c.
The level of wages
d.
The level of import prices
e.
All of the above.
12. Philips curve shows the relationship between
346
a.
GDP and investment
b.
Unemployment rate and rate of inflation
c.
CPI and inflation
d.
Savings rate and equilibrium output
e.
None of the above.
Part III
13. Which of the following g is most important in increasing the rate of economic growth?
A highly progressive tax structure.
b.
High interest rates on time deposits.
c.
Increasing the percentage of GDP used for investment.
d.
A constant supply of funds available to investors.
e.
Reducing inequality of income distribution and wealth.
Keynes held that money is used

To settle transactions
b.
To meet unexpected contingencies
c.
To take advantage of fluctuating rates of interest
d.
e.
04
20
04
04
a.
M
AC
14.
a.
o.
15. Unemployment, inflation and the rate of growth of actual GDP are all examples of
Policy variables
b.
Exogenous variables
c.
Endogenous variables
d.
Macroeconomic variables of an economy
e.
None of the above.
1-
31
4-
02
27
-4
ef
.N
a.
:8
16. Which of the following relationships is true?
Personal income = National income Retained earnings + Corporate taxes.
b.
Personal income = National income Retained earnings Corporate taxes.
c.
National income = NNP at factor cost Depreciation.
d.
GDP at factor cost = GNP at market prices Indirect taxes + Subsidies.
e.
Retained profit = National income Personal income.
ig
ht
re
se
rv
ed
.IS
BN
a.
s.
Al
lr
17. Liquidity trap refers to a situation where

There is too much liquidity in the economy
b.
The firms in the economy are facing credit crunch
c.
Interest rates do not decrease, no matter how much the money supply is expanded
d.
The country faces a severe shortage of foreign exchange
e.
None of the above.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
20
04
Th
e
Ic
18. The difference between the actual fiscal deficit and Cyclical Neutral Fiscal Deficit (CNFD) is
known as
a. Fiscal stance
b. Fiscal impulse
c. Gross fiscal deficit
d. Neutral fiscal deficit
e. Cyclical fiscal deficit.
a. Shift both IS and LM curves to the right
b. Shift both IS and LM curves to the left
c. Not affect the position of LM curve but shift the IS curve to left
d. Not affect the position of IS curve but shift the LM curve to right
e. Not affect the position of LM curve but shift the IS curve to right.
347
Macroeconomics
20. Curve that illustrates the relationship between the rate of change in prices and the rate of
unemployment is known as
a.
Lucas supply curve
b.
Laffer curve
c.
Philips curve
d.
Classical aggregate supply curve
e.
Keynesian aggregate supply curve.
b.
Forward market
c.
Future market
d.
Spot market
e.
Swap market.
04
Euro currency market
ef
.N
o.
M
AC
04
20
a.
04
21. In which market foreign exchange is bought and sold for delivery at a future date at the rate
of exchange agreed upon today
22. Velocity of circulation means
The average turnover of money in a period, relative to the national income
b.
The ratio of money supply to income
c.
The ratio of money demand to income
d.
The ratio of money demand to money supply
e.
The ratio of money demand to supply of high-powered money.
BN
:8
1-
31
4-
02
27
-4
a.
.IS
23. Which of the following is true regarding Laffer curve?

Increase in tax rate always leads to an increase in tax revenue.
b.
Increase in tax rate always leads to a decrease in tax revenue since people search for
alternatives to evade tax.
c.
Increase in tax rate, up to a certain level, leads to an increase in tax revenue and later
results in decrease of tax revenue.
d.
Decrease in tax rate leads to an increase in tax revenue since more people will come
forward to pay taxes.
e.
None of the above.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
a.
24. Supply of money remaining constant, an increase in demand for money, will result in
A fall in the level of prices
b.
An increase in the rate of interest
20
04
iU
fa
Ic
Th
e
c.
ni
a.
A decrease in the rate of interest
d.
An increase in level of income and employment
e.
25. A neoclassical aggregate supply schedule exists
348
a.
At an output rate greater than the natural rate of unemployment
b.
At an output level determined by the supply of and demand for labor
c.
When the demand for labor and supply of labor schedules adjust immediately to a
change in the price level
d.
When equilibrium in the labor markets is unaffected by shifts in the supply of labor
schedule
e.
None of the above.
Part III

a.
There is net debt balance in the merchandise account
b.
There is net credit balance in the merchandise account
c.
d.
Decrease in Foreign Exchange Reserves
e.
Increase in Foreign Exchange Reserves.
Causes the real money supply to increase, which changes the composition of output
b.
Has no effect on the real money supply or the composition of output
c.
Causes a proportional increase in real output
d.
Reduces the rate of interest and changes the composition of output
e.
None of the above.
ef
.N
o.
M
AC
04
20
a.
04
04
27. Suppose there is full employment and a vertical aggregate supply schedule. An increase in
the nominal money supply
27
-4
28. When the aggregate supply schedule is positively sloped, continuous increases in the nominal
money supply, ceteris paribus, result in
No change in the price level and proportional increases in real output
b.
No change in real output and proportional increases in the price level
c.
An increase in the price level and real output
d.
An increase in the price level and a decrease in real output
e.
None of the above.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
re
29. Other things remaining constant, an increase in the marginal propensity to import will
Increase the multiplier
b.
Increase the consumption in the economy
c.
Decrease the investment in the economy
d.
Reduce the multiplier
e.
Not affect the income in the economy.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
30. An expansionary monetary and fiscal policy shifts

Aggregate demand to the right
b.
Aggregate demand to the left
20
04
iU
fa
Ic
Th
e
c.
ni
a.
Aggregate supply to the right
d.
Aggregate supply to the left
e.
31. Total market value of all the final goods and services produced in a given period by factors of
production located within a country is
a.
Gross National Product at market prices
b.
Gross Domestic Product at market prices
c.
Net National Product at market prices
d.
Gross National Product at factor cost
e.
Gross Domestic Product at factor cost.
349
Macroeconomics
04
20
04
B
W
M
AC
33. All entries in the balance of payments statement should collectively sum to
a. GDP of that country
b. GNP of the country
c. Foreign exchange reserves of that country
d. Zero
e. Exports of that country.
04
32. The quantity theory of money implies that a given percentage change in the money supply
will cause
a. An equal percentage change in nominal GDP
b. A smaller percentage change in nominal GDP
c. A larger percentage change in nominal GDP
d. An equal percentage change in real GDP
e. A smaller percentage change in real GDP.
ef
.N
o.
34. If the anticipated rate of inflation rises, other things remaining constant, we would expect the
nominal interest rate to
Remain unchanged
b.
Rise by the same percentage as the increase in the anticipated rate of inflation
c.
Fall by the same percentage as the increase in the anticipated rate of inflation
02
27
-4
a.
Rise, but by less than the anticipated increase in the rate of inflation
e.
Fall, but by less than the anticipated increase in the rate of inflation.
1-
31
4-
d.
:8
Domestic spending exceeds domestic income
b.
Domestic income exceeds domestic spending
c.
Exports exceeds imports
d.
Domestic savings exceed domestic investment
e.
None of the above.
ig
ht
re
se
rv
ed
.IS
BN
a.
s.
Al
lr

Shift both IS and LM curves to the right
Pr
es
a.
Shift both IS and LM curves to the left
c.
Not affect the position of LM curve but shift the IS curve to left
d.
Not affect the position of IS curve but shift the LM curve to right
e.
Not affect the position of LM curve but shift the IS curve to right.
iU
ni
ve
rs
i
ty
b.
Ic
fa
37. Increase in net RBI credit to the Central Government is reflected in which of the following?
Budget deficit.
Revenue deficit.
Monetized deficit.
d.
e.
Gross primary deficit.

Gross fiscal deficit.
20
04
Th
e
a.
b.
c.
38. The basic difference between money stock measure M3 and M4 is that
a. M3 is more than M4
b. M2 is part of M3 whereas M2 is not part of M4
c. M3 is part of M1 and M4 is not part of M1
d. M4 includes all post office deposits, whereas in M3 these are not included
e. M1 is part of M4 where as M1 is not part of M3.
350
Part III
M
AC
04
20
04
04
39. Which of the following variables will be at low levels during boom phase of a business cycle?
a. Bank reserves.
b. Wage rates.
c. Bank credit.
d. Inventory.
e. Cost of production.
40. Financial Inter-relations ratio is
a. The ratio of total financial claims issued during a year to the national income for the year
b. The ratio of primary issues by the non-financial sector to total physical asset formation
c. The ratio of volume of financial instruments issued by financial intermediaries during a
period to the volume of primary issues by the non-financial sector
d. The ratio of the total stock of financial assets at a point of time to the stock of physical assets
e. Ratio of total financial claims to total physical asset formation.
ef
.N
o.
5,000
1,500
700
1,300
500
600
200
50
Nil
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Particulars
Sales to households
Sales to government
Indirect taxes
Gross fixed investment
Change in inventories
Depreciation
Current account balance
Subsidies
(2 points)
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
The Net Domestic Product of the country at market prices is

a. 6,500 MUC
b. 7,000 MUC
c. 7,500 MUC
d. 8,000 MUC
e. 8,500 MUC.
iU
20
04
Th
e
Ic
fa
Particulars
MUC
Indirect taxes
700
Depreciation
600
200
Subsidies
50
Nil
If the NDPMP of the country is 7,500 MUC, what would be the total value of all final goods
and services produced by all factors of production of the country at factor cost?
a. 7,450 MUC.
b. 7,350 MUC.
c. 7,250 MUC.
d. 7,150 MUC.
e. 7,050 MUC.
(1 point)
351
Macroeconomics
43. The following relations are derived for an economy. (All macro aggregates are in million units of
currency and interest in terms of percent per annum)
(S)
(Yd)
(R)
(T)
(I)
(G )
80 + 0.1875 Yd + 5i
YT+R
80
0.2Y
600 + 0.05Y 15i
965
Import function
(M)
20 + 0.10Y
Exports
(E)
450
04
04
Savings Function
Disposable income
Transfer payment
Tax Function
Mt
0.25Y
Ma
200 50i
Money supply
Ms
600
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1-
BN
:8
The equilibrium income of the above economy is

a. 4,500 MUC
b. 4,525 MUC
c. 4,550 MUC
d. 4,575 MUC
e. 4,600 MUC.
20
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
(3 points)
44. The IS and LM functions of a hypothetical economy are found to be Y = 5,350 50i and
Y = 1,600 + 200i respectively. Part of the economys imports is autonomous, while the other
part is dependent on the total income of the economy. The import function of the economy is
estimated to be 20 + 0.10Y. The exports of the economy are 450 MUC. At equilibrium, the
trade balance of the economy is
a. (30) MUC
b. 40 MUC
c. (50) MUC
d. 60 MUC
e. (70) MUC.
(2 points)
45. The following relations are derived for a fictitious economy.
20
04
Th
e
Ic
Disposable income
Transfer payment
Tax function
(Yd)
(R)
(T)
(G)
YT+R
80
0.2Y
965
Goods market equilibrium

(IS)
0.4Y = 2140 20i
Money market equilibrium
(LM)
0.25Y = 400 + 50i
Suppose exports increase by 100 MUC, what is the impact on the budget deficit?
a.
Decrease by 60 MUC.
b.
Increase by 60 MUC.
c.
Decrease by 50 MUC.
d.
Decrease by 70 MUC.
e.
None of the above.

(3 points)
352
Part III
46. The following are the indicators of financial development of the economy:
04
20
04
04
Particulars
2001
Finance Ratio (FR)
0.25
Financial Interrelations Ratio (FIR)
1.20
Intermediation Ratio (IR)
0.70
New issues
12,000 MUC
The Net Physical Capital Formation for the year 2001 is
a. 16,500 MUC
b. 17,000 MUC
c. 17,500 MUC
d. 18,000 MUC
e. 18,500 MUC.
(2 points)
M
AC
47. The following are the indicators of financial development of the economy:
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
Particulars
2000
2001
Finance Ratio (FR)
0.28
0.25
Financial Interrelations Ratio (FIR)
1.75
1.20
Intermediation Ratio (IR)
0.75
0.70
For the year 2001 new issues are 12,000 (MUC).
Which of the following statements is/are true with respect to the above data?
a. Decrease in FR indicates increased financial deepening of the economy.
b. Financial development of the country is less than the overall economic development of
the country during the period.
c. Decline in IR shows financial intermediation in the economy.
d. Ultimate users of funds indirectly access funds from ultimate savers, thereby avoiding
financial intermediaries like banks and financial institutions.
re
(1 point)
s.
Al
lr
ig
ht
the year 2000-2001.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
New is sues ratio

0.74
Net physical capital formation
2,00,445
Secondary issues
1,15,605
What is the Intermediation Ratio in the economy?
a. 0.69.
b. 0.86.
c. 0.78.
d. 0.92.
20
04
(1 point)
49. The following balances are extracted from balance sheet of a Central Bank.
Particulars
Net worth
Other deposits
Government deposits
Credit to banking sector
Other assets

1,000
50
100
1,500
800
1,200
200
300
353
Macroeconomics
04
Current money supply in the economy is 12,000 MUC. Currency deposit ratio for the
economy is 0.20 and reserve ratio imposed by the Central Bank is 10%. Government money
in the economy is negligible and can be ignored.
What are the net foreign exchange assets (reserves) of the country, assuming there are no
excess reserves with the banking sector?
a. 510 MUC.
b. 450 MUC.
c. 500 MUC.
d. 520 MUC.
e. 530 MUC.
20
04
(3 points)
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
50. The High-powered money in an economy is 3,000 MUC. Current money supply in the
economy is 12,000 MUC. The currency deposit ratio is estimated to be 0.20 and reserve ratio
imposed by the Central Bank is 0.10. If the banking sector maintains excess reserves
equivalent to 10% of their deposits, what would be the money supply?
a. 8,800 MUC.
b. 9,000 MUC.
c. 9,100 MUC.
d. 9,150 MUC.
e. 9,200 MUC.
(2 point)
BN
:8
51. The following information is related to external transactions of India for the year 2000-01.
ed
se
rv
re
44,894
59,264
19,185
ig
ht
Merchandize exports
Merchandize imports
Services rendered by Indians to
rest of the world
US $ million
.IS
Particulars
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
Services rendered by rest of the

16,392
world to Indians
Foreign investment in India
12,617
Foreign investment abroad
9,706
Loans by India
18,545
Loans to India
23,076
Transfers and income to India
15,577
Transfers and income from India
6,264
Other capital (credit)
16,133
Other capital (debit)
16,088
Errors and omissions (credit)
633
What are the current and capital account balances of the country for the year 2001?
a.
$2,264 million and $ 7,487 million respectively.
b.
$ (2,126) million and $ (7,487) million respectively.
c.
$ (2,392) million and $ 6,235 million respectively.
d.
$ 2,448 million and $ (6,235) million respectively.
e.
None of the above.

(2 points)
354
Part III
04
20
04
B
W
(3 points)
31
4-
02
27
-4
ef
.N
o.
M
AC
Particulars
(Rs. in crore)
Tax revenue
1,16,857
Non-tax revenue
45,137
Recoveries of loans
9,908
Other capital receipts
5,000
Borrowings/other liabilities
91,025
Non plan expenditure
On revenue account (of which interest payment is
1,66,301
Rs.75,000 crore)
On capital account
29,624
Plan expenditure
On revenue account
43,761
On capital account
28,241
The revenue and primary deficit of the government for the year 2001-02 are
a. Rs.49,502 crore and 16,025 crore
b. Rs.47,239 crore and 14,075 crore
c. Rs.48,068 crore and 16,025 crore
d. Rs.45,002 crore and 15,225 crore
e. Rs.48,068 crore and 15,225 crore.
04
52. The following estimates are extracted from the Union Budget for the year 2001-02.
:8
1-
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
Particulars
Sales to households
5,000
Corporate profits
2,000
800
Depreciation
600
Transfer payments
300
Dividends
200
200
GNP at factor cost
7,450
The savings made by the households during the year is
a. 100 MUC
b. 125 MUC
c. 150 MUC
d. 175 MUC
e. 200 MUC.
54.
Particulars
Sales to government
Indirect taxes
Corporate profits
Depreciation
Transfer payments
Dividends
Subsidies
Personal savings
(2 points)
1,500
700
2,000
800
600
300
200
50
200
150
355
Macroeconomics
The Gross Domestic Savings for the current year is

a.
1,450
b.
1,550
c.
1,600
d.
1,700
e.
1,650.
(2 points)
55. The consumption function for an economy is ascertained as
04
04
Ct = 250 + 0.60 Ytd + 0.20 Ct1
802.25 MUC.
e.
808.10 MUC.
o.
d.
ef
.N
794.15 MUC.
c.
-4
782.35 MUC.
27
b.
02
759.50 MUC.
(2 points)
1-
31
4-
a.
M
AC
04
20
Where Ct and Ct1 denote consumption in period t and t1 respectively and Ytd is the
disposable income in period t. The Ytd has been 500 for a long time. If Ytd increases by 100
in period t, what will be the consumption in the second period, t + 2 (Assume the steady
state level of consumption in the economy)?
d.
15.00%.
e.
16.00%.
ig
11.25%.
lr
c.
s.
Al
10.50%.
Pr
es
b.
ty
10.04%.
ve
rs
i
a.
ht
re
se
rv
ed
.IS
BN
:8
56. The currency deposit ratio in an economy is estimated to be 0.4. The central bank of the country
imposed a reserve ratio of 10%. Monetary liabilities of the central bank stood at 50,000 million
units of currency (MUC). Due to an exogenous boost to the economy, the foreign exchange
reserves of the country are expected to increase by 500 million dollars during the next period. If
the central bank would like to neutralize the impact of change in foreign exchange reserves on
the money supply by adjusting the reserve ratio, what should be the new reserve ratio? (Assume
that the exchange rate is 12 units of local currency to a dollar)
iU
ni
(2 points)
20
04
Th
e
Ic
fa
57. The following information relates to an economy:

Particulars
National income
Wages & Salaries
Interest income
Rental income
MUC
300
180
45
30
The profit in the economy is

a.
b.
c.
d.
e.
15 MUC
25 MUC
35 MUC
45 MUC
55 MUC.
(1 point)
356
Part III
Answer Questions 58-61 based on the following information:
M
AC
04
20
04
04
MUC
5,000
4,200
1,075
800
750
75
100
650
350
350
950
300
150
o.
Particulars
NNP at factor cost
Personal saving
Gross domestic investment
Corporate profits (profit before tax)
Transfer payments by the government
Subsidies
Net domestic investment
Indirect taxes
Government budget deficit
Dividends
BN
.IS
ed
se
rv
(2 points)
s.
Al
lr
ig
ht
re
59. The value of GDP at factor cost is

a. 4,100 MUC
b. 4,150 MUC
c. 4,250 MUC
d. 4,300 MUC
e. 4,400 MUC.
(1 point)
:8
1-
31
4-
02
27
-4
ef
.N
58. What is the Net Factor Income Earned from Abroad (NFIA) in the economy?
a. 1,650 MUC.
b. 1,650 MUC.
c. 50 MUC.
d. 50 MUC.
e. 100 MUC.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
60. Personal income in the economy is

a. 3,525 MUC
b. 3,375 MUC
c. 3,675 MUC
d. 4,725 MUC
e. 5,025 MUC.
(1 point)
20
04
Th
e
61. The current account balance in the economy is

a. 225 MUC
b. 325 MUC
c. 375 MUC
d. 875 MUC
(3 points)
62. The following information is extracted from National Income Accounts of an economy:
Investment by business sector
= 100 MUC
= 50 MUC
Dividends paid by the business sector = 15 MUC
Retained earnings
= 20 MUC
357
Macroeconomics
Corporate profits for the economy is

a. 20 MUC
b. 35 MUC
c. 85 MUC
d. 150 MUC
e. 185 MUC.
(1 point)
04
:8
1-
31
4-
02
27
10 MUC
20 MUC
30 MUC
40 MUC
50 MUC.
(2 points)
.IS
BN
a.
b.
c.
d.
e.
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AC
04
20
Particulars
MUC
Factor income paid abroad by the business sector
10
Factor incomes received by household sector
160
20
Wages and salaries paid by the business sector
100
Dividends paid by the business sector (of which Rs.10 is paid abroad)
20
Household savings
60
Factor income received from abroad by the household sector
20
The amount paid by the government to the households towards wages and salaries is
04
63. Consider the following data:
(1 point)
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
64. Savings function of an economy is S = 300 + 0.25 Yd. Break-even disposable income for
the economy is
a. 75 MUC
b. 300 MUC
c. 900 MUC
d. 1,200 MUC
e. 1,500 MUC.
ve
rs
i
65. The following information is extracted from the National Income Accounts of an economy:
20
04
Th
e
Ic
fa
iU
ni
Particulars
Factor income received by domestic residents from business sector
Factor income received by domestic residents from foreigners
Gross investment
Retained earnings
Net indirect taxes
Corporate profit taxes
Dividends
National Income (NI) of the economy is
a. 560 MUC
b. 620 MUC
c. 640 MUC
d. 720 MUC
e. 810 MUC.
MUC
500
20
200
25
60
15
100
5
100
(2 points)
358
Part III
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04
20
04
04
66. The IS function and LM function of an economy are estimated to be Y = 2860 + 0.5Y 60i
and Y = 2600 + 400i respectively. The investment function in the economy is 800 50i. If
the government wants to increase the output by 10% by raising the government expenditure,
what is the crowding out in the economy?
a. 52.5 MUC.
b. 55.5 MUC.
c. 62.5 MUC.
d. 500.0 MUC.
(2 points)
67. The money supply in an economy is estimated to be 250 MUC and the transaction plus
precautionary demand for money is 0.20Y. The speculative demand for money is 150 50i.
If the income level in the economy is 700 the rate of interest in the economy is
a. 0.7%
b. 0.8%
c. 0.9%
d. 1.0%
e. 1.2%.
(1 point)
Answer Questions 68 and 69 based following information:
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Year
Nominal GNP GNP deflator
2001-02
5000
250
2002-03
6600
300
68. What is the growth rate of real GNP from year 2001-02 to 2002-03?
a. 10.0%.
b. 32.0%.
c. 20.0%.
d. 58.4%.
e. 53.6%.
(1 point)
ty
Pr
es
s.
Al
lr
ig
ht
69. What is the rate of inflation in the economy for the year 2002-03?
a. 10.0%.
b. 32.0%.
c. 20.0%.
d. 58.4%.
e. 53.6%.
20
04
Th
e
Ic
fa
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ni
ve
rs
i
(1 point)
70. GDP of a country is 8000 MUC. Value of output produced in the domestic country by
foreign factors of production is 200 MUC and value of the output produced by domestic
factors of production in foreign countries is 100. GNP of the country is
a. 7,700 MUC
b. 7,800 MUC
c. 7,900 MUC
d. 8,100 MUC
e. 8,200 MUC.
(1 point)
71. The LM function of an economy is estimated to be Y = 750 50i. The transaction demand for
money and speculative demand for money are 0.25Y and 150 20i respectively. If output in
the economy is 600 MUC, the velocity of money in the economy is
a. 0.40
b. 4.00
c. 5.00
d. 2.50
e. 250.00.
(3 points)
359
Macroeconomics
72. In a hypothetical economy, the high-powered money is 2000 MUC and the money supply is
6000. Currency deposit ratio is estimated to be 0.2. The central bank sells government
securities worth 500 MUC in the open market. Even after the open market sale, if the central
bank wants to maintain the money supply at the same level, the reserve ratio should be
0.1%
b.
1.0%
c.
3.0%
d.
10.0%
e.
30.0%.
04
a.
04
(1 point)
04
20
Rs.250
b.
Rs.2,250
c.
Rs.2,500
d.
Rs.5,000
e.
None of the above.
(1 point)
4-
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a.
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31
74. There are different stages in the production of good Zebra. The values at each stage are
given as under:
lr
ig
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ed
.IS
BN
Particulars
Value
Raw material
30
Manufacturing
50
Packaging
80
Retailing
120
The value added in manufacturing stage and the total value added in the process of producing
Zebra are
20 and 120, respectively
20 and 50, respectively.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
b.
c.
d.
e.
(1 point)
20
04
Th
e
Ic
fa
75. In a hypothetical economy, if the marginal propensity to consume is 0.8; marginal propensity to
import is 0.14; and the tax rate is 20%, then the value of multiplier will be
a.
b.
c.
d.
e.
6.
(1 point)
360
Macroeconomics
Model Question Paper II

Suggested Answers
1. (d) Increase in money supply reduces the interest rates but it may end up raising the nominal
rates by increasing inflation.
2. (b) GNP = GDP + Net factor income from abroad.
04
04
3. (b) Potential GDP is the maximum feasible GDP of an economy when all the resources are
fully employed.
04
20
4. (e) Macroeconomics deals with the study of economy as a whole; it seeks to analyze the
sources of inflation, unemployment, economic growth. It also explains about the policies to
be implemented for the achievement of macroeconomic objectives.
ef
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AC
5. (a) In the Simple Keynesian model, movements of the economy from one equilibrium point
to another can be gauged with the help of a single assumption that business firms raise
production as soon as demand increases and that this results in an equivalent raise in income
payments. Thus, the Simple Keynesian multiplier model is based on the principle that
national output moves up and down in response to movements in aggregate demand.
02
27
-4
6. (b) Real GNP is the GNP in current rupees deflated for the changes in the prices of items
included in nominal GNP. [Hint: Real GNP = Nominal GNP/Price index].
1-
31
4-
7. (a) If the people decide to save less, MPS decreases. So MPC increases. [Hint: MPC = Y
MPS].
BN
:8
8. (d) According to the Keynesian model of output determination, GDP is in equilibrium when
planned savings equals planned investment.
re
se
rv
ed
.IS
9. (a) Tax reductions induce more consumption, but decrease the government expenditure. If
increase in the consumption is same as decrease in government expenditure then output won't
change. So it is not always true that increase in personal consumption resulting from tax
decreases would increase the real GDP.
lr
ig
ht
10. (b) Sterilization is neutralization of changes in the money supply caused by changes in the
foreign exchange reserves of a country.
Pr
es
s.
Al
11. (e) There are several factors which affect Aggregate supply such as change in the cost of
production, supply shocks, technology, raw materials labor supply, etc. All the factors given
affect the aggregate supply in an economy. Hence answer is (e).
ve
rs
i
ty
12. (b) Philips curve shows the relationship between the inflation rate and unemployment rate.
20
04
Th
e
Ic
fa
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ni
13. (c) Increase in investment leads to efficiency in the use of resources and increase the rate of
economic growth.
14. (e) Keynes held that demand for money consists of
i.
ii. Precautionary demand for money and
iii. Speculative demand for money
Hence, the answer is (e).
15. (d) Since unemployment, inflation and the growth rate of GDP are all variables showing the
economy as a whole (in the macro sense) these are all macroeconomic variables.
16. (b) Personal income is the total income received by individuals that is available for
consumptions saving and payment of personal taxes. Personal income = National income
Retained earnings Corporate taxes.
17. (c) A liquidity trap refers to a situation where lower interest rates fail to stimulate demand. It
may arise when a slowing economy reduces demand for loans. Lenders see asset quality
deteriorate and become more reluctant to lend. The combination of reluctant bankers and
borrowers turns loan growth negative, which further depresses economic activity. During this
period, interest rates do not decrease, no matter how much the money supply is expanded.
361
Macroeconomics
18. (a) Fiscal stance is the difference between actual fiscal deficit and cyclical neutral fiscal
deficit.
19. (e) Expansionary fiscal policies will shift the IS curve towards right but will not affect LM curve.
20. (c) Philips curve shows the relationship between unemployment and inflation (i.e. rate of
change in prices).
21. (b) The market in which foreign exchange is bought and sold for delivery at a future date at
the rate of exchange agreed upon today is called forward market.
04
22. (a) Velocity of circulation is the rate at which money moves as it carries out its functions or
it is the average number of times per year that each rupee of stock of money is spent for
output.
04
20
04
23. (c) Laffer curve shows the relation between total tax revenue and tax rates. It shows that
increase in tax rates up to a certain level leads to an increase in tax revenue and latter results
in decrease of tax revenue.
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24. (b) Ceteris paribus, an increase in demand for money, increases the rate of interest in the
economy. The figure given below explains this phenomenon.
ed
.IS
25. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of
labor schedules adjust immediately to a change in the price level.
ht
re
se
rv
26. (c) A current account deficit implies that foreign exchange outflows on account of import of
goods and services and gifts made exceed inflows on account of exports of goods and
services received.
Pr
es
s.
Al
lr
ig
27. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to
increase in price level. But it will not have any effect on the real money supply or the
composition of output, because the economy already running at full employment.
ni
ve
rs
i
ty
28. (c) When the aggregate supply schedule is positively stopped, continuous increase in the
nominal money supply center is paribus, results in an increase in the price level and real
output.
Th
e
Ic
fa
iU
20
04
30. (a) An expansionary monetary and fiscal policy increases the aggregate demand in the
economy, which leads to shift in AD curve towards right.
31. (b) a.
GNPMP is the total market value of the final goods and services produced in a
given period by factors of production owned by the citizens of a country.
b.
GDPMP is defined as the total market value of all the final goods and services
produced in a given period by factors of production located within a country.
c.
NNPMP is GNPMP depreciation.
d.
GNPFC is the total value of the final goods and services produced in a given period
by factors of production owned by the citizens of a country and valued at factor cost.
e.
GDPFC is the total market value of the final goods and services produced in a given
period by factors of production located within a country and valued at factor cost.
362
Part III
32. (a) Quantity theory of money (QTM) says

MV = PY
Where,
M = money supply
V = velocity of money
P
= price level
Y = real GDP
PY = nominal GDP
Assuming V is a constant, a change in M leads to an equal percentage change in PY.
(c) Increase in net RBI credit to government is called Monetized deficit.
ht
37.
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ed
.IS
BN
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04
20
04
04
33. (d) Preparation of BoP statement is based on double-entry system of bookkeeping. Hence, all
debt items should equal credit items, and the balance is zero.
34. (b) Expected nominal interest rate = Real interest rate + Expected rate of inflation.
Therefore, if the expected inflation goes up, expected nominal rate of interest also goes up by
the same amount. Hence the answer is (b).
35. (a) Y = C + I + G + Net Exports
Where Y = Domestic income
C + I + G = Domestic spending.
Y (C + I + G) = Net Exports (Current Account Balance)
If Current Account Balance is negative, then domestic spending is greater than domestic income.
The answer is (a).
(b) If domestic income exceeds domestic spending, there is current account surplus.
(c) Current account balance is equal to exports imports. If exports exceed imports, there
is current account surplus.
(d) If domestic savings exceed domestic investment, domestic income exceeds domestic
spending and there is current account surplus.
36. (e) Expansionary monetary policy will shift the LM curve to the right and contractionary
monetary policy will shift the LM curve to the left. Expansionary fiscal policies will shift the
IS curve towards right but will not affect LM curve.
ni
b.
c.
d.
During a boom bank reserves will be high as the bank credit is high to support the
increased economic activity.
Wage rate will be high as demand for labor increase during the boom phase.
As the economic activity increase during the boom phase bank credit also increases.
During a boom demand increased at a faster rate and inventories tend to be low.
All other variables tend to increase during a boom.
Cost of production will be high as demand for factors of production will be relatively
high during the boom phase.
ve
rs
i
a.
20
04
Th
e
Ic
fa
iU
39. (d)
ty
Pr
es
s.
Al
lr
ig
38. (d) M2 = M1 + Post office savings Bank Deposits

M3 = M1 + Time Deposits
The answer is (d).
e.
40. (d) Financial Inter relations ratio

=
Total Stock of Financial Assets

Total Stock of Physical Assets
Or
=
Total Financial Claims Issued

Net Physical Capital Formation
Therefore, the Answer is (d).
363
Macroeconomics
Part B: Problems
41. (c) NDP at market prices = Sales to households + Sales to government + Net investment +
Net exports (Current Account Balance)
= 5,000 + 1,500 + 1,200 200 = 7,500
Net Investment = Gross fixed investment + Change in inventories Depreciation
= 1,300 + 500 600 = 1,200.
04
04
42. (a) GNP at factor cost = NDPMP + Depreciation Indirect taxes + Subsides + Net factor
income from abroad
80 + 0.8125 Yd 5i
Yd
(Y T + R) = (Y 0.2Y + 80)
0.8Y + 80
80 + 0.8125 [0.8Y + 80] 5i = 145 + 0.65Y 5i.
B
W
M
AC
o.
C + I + G + (E M)
145 +0.65Y 5i + 600 + 0.05Y 15i + 965 + 450 (20 + 0.10Y)
BN
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ed
.IS
2,140 + 0.60Y 20i

2,140 20i
Y =
= 5350 50i . (1)
0.40
LM Function
:8
1-
31
4-
600
Pr
es
s.
Al
= 0.25Y + 200 50i
0.25Y
= 400 + 50i
= 1,600 + 200i . (2)
ve
rs
i
ty
ig
lr
Money Supply = 600
ht
re
Money demand (Md) = 0.25Y + 200 50i
ni
Equilibrium Y and i can be found by equating (1) and (2)
iU
1,600 + 200i
250i
3,750
15%
5,350 (50 x 15)
4,600.
Th
e
Ic
fa
5,350 50i
20
04
44. (a) At equilibrium,

5,350 50i = 1,600 + 200i
250i = 3,750
i = 3,750/250 = 15
Hence, Y = 5,350 50 (15) = 4,600.
Trade balance = 450 [20 + 0.10 (4,600) ] = 30 MUC.
364
ef
.N
02
27
IS Function
Y
80 + 0.1875 Yd + 5i
04
-4
43. (e)
20
= 7,500 + 600 700 + 50 + 0 = 7,450.
04
20
04
45. (e) 0.4Y = 2,140 20i

Y
= 5,350 50i
0.25Y
= 400 + 50i
Y
= 1,600 + 200i
At equilibrium,
5,350 50i = 1,600 + 200i
250i = 3,750
Or, i = 15%.
Hence, Y = 5,350 50(15) = 4,600.
Budget deficit = T G R = 0.2(4,600) 965 80.
920 965 80 = 125.
If exports increase by 100, the new IS function would be 0.4Y = 2,140 + 100 20i
04
Part III
M
AC
0.4Y = 2,240 20i
4-
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27
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ef
.N
o.
Or, Y = 5,600 50i

At equilibrium,
IS = LM
Thus, 5,600 50i = 1,600 + 200i
250i = 4,000
i = 16%.
1-
31
Y = 5,600 50(16) = 4,800
ed
Secondary issues
New issues
se
rv
IR =
46. (b)
.IS
BN
:8
Thus, budget deficit = T G R = 0.2(4,800) 965 80 = 85.

Thus, decrease in budget deficit=12585=40 MUC.
ht
ig
= 8,400 (MUC)
re
Secondary issues for the year 2001= (0.70 x 12,000)
s.
Al
lr
Total issues = New issues + Secondary issues
Pr
es
= 12,000 + 8,400
ty
= 20,400 (MUC)
Total Issues
Net Physical Capital Formation (NPCF)
ve
rs
i
=
iU
ni
FIR
20,400
= 17,000 (MUC).
1.20
Th
e
Ic
fa
NPCF =
20
04
47. (b) Decrease in FR indicates decreased financial deepening of the economy. That is,
financial development of the country is less than the overall economic development of the
country during the period.
Decline in IR indicates financial disintermediation in the economy. That is, ultimate users of
funds directly access funds from ultimate savers, thereby avoiding financial intermediaries
like banks and financial institutions.
48. (c) Intermediation ratio = Secondary issues/ Primary issues
New issues ratio = Primary issues/Net capital formation = 0.74
Thus, 0.74
= x/2,00,445
Or, x
= 1,48,329.3
Hence, intermediation ratio = 1,15,605/1,48,329.3 = 0.78 approximately.
365
Macroeconomics
1 + Cu
49. (c) Money Supply (Ms) = H x
Cu + r
Where, High Powered Money (H) = Monetary Liabilities of RBI (MLRBI) + Government
money.
H=
Ms
1 + Cu
Cu + r
12,000
= 3,000 MUC
1 + 0.2
0.2 + 0.10
04
Since Government money is negligible, H equals MLRBI.

=
Financial Assets of RBI (FARBI) + Other Assets Non-monetary

Liabilities (NMLRBI).
FARBI
Credit to Government + Credit to Commercial Sector + Credit to

banking sector + Net Foreign Exchange Assets (NFEA).
1,500 + 800 + 1,200 + NFEA = 3,500 + NFEA.
M
AC
NMLRBI
04
20
04
MLRBI
Net Worth + Government Deposits + Other Non-Monetary Liabilities

1,000 + 100 + 200 = 1,300 MUC.
3,000
3,500 + NFEA + 300 1,300
NFEA
3,000 2,500 = 500 MUC.
27
-4
ef
.N
o.
=
=
4-
02
Therefore, net foreign exchange assets of the country are 500 MUC.
1-
31
50. (b) H = 3,000
:8
Ms = 12,000
BN
Cu = 0.2
ed
.IS
Reserve Ratio = CRR + Excess Reserve Ratio = 0.1 + 0.1 = 0.2
re
se
rv
Thus, the new money supply in the market = H x Money multiplier = 3,000 x (1 + 0.2)/(0.2 + 0.2)
= 9,000 MUC.
ht
51. (e)
s.
Al
lr
ig
US $ Millions
Pr
es
Current Account
Credit
Debit
Net
4489
59264
(1437)
Merchandise
ii.
Invisibles (a + b)
34762
22656
12106
a.
Services
19185
16392
2793
Transfers and Income
15577
6264
9313
79656
81920
(2264)
ve
rs
i
ty
i.
b.
fa
iU
ni
A.
Th
e
Ic
Total current Account (i + ii)
20
04
B.
Capital Account
i.
Foreign investment
12617
9706
2911
ii.
Loans
23076
18545
4531
iii.
Other capital
16133
16088
45
51826
44339
7487
633
633
126259
5856
5856
(5856)
Total Capital Account

(i + ii + iii)
366
C.
Errors and Omissions
D.
Overall Balance (A + B +C)
132115
E.
Foreign Exchange Reserves
Part III
52. (c) Revenue Surplus (Deficit) = Revenue Receipts Revenue Expenditure = [Tax Revenue +
Non-tax Revenue] [Plan and Non-plan Revenue Expenditure] = [(1,16,857 + 45,137)
(1,66,301 + 43,761)] = Rs. (48,068) million.
Primary Deficit = Borrowings and liabilities Interest payments = 91,025 75,000
= Rs. 16,025 million.
53. (c) Personal Savings
= Personal Disposable Income (PDI) Personal Consumptions

= Personal Income (PI) Personal Income Tax
PI
= NNPFC Corporate profits + Dividends + Transfer payments
NNPFC
= GNPFC Depreciation = 7,450 600 = 6,850 MUC
PI
= 6,850 2,000 + 200 + 300 = 5,350 MUC
PDI
= 5,350 200 = 5,150 MUC
Personal Savings
= 5,150 5,000 = 150 MUC.
04
20
04
04
PDI
o.
M
AC
54. (c) Gross Domestic Savings = Retained earnings (RE) + Budget surplus + Personal savings +
Depreciation.
ef
.N
RE = Corporate ProfitsCorporate Profit tax Dividends = 2,000 800 200 = 1,000 MUC
-4
BS = Tax Revenue Government Purchases Transfer Payments Subside

= (700 + 800 + 200) 1,500 300 50 = 150 MUC
31
4-
02
27
Gross Domestic Savings

= 1,000 150 + 150 + 600 = 1,600 MUC.
:8
1-
Ct = 250 + 0.60 Ytd + 0.20 Ct 1
55. (a)
ed
.IS
Ct = Ct-1
BN
At steady state level of consumption.
ig
ht
= 250 + 0.60 Ytd
lr
0.80 Ct
re
Ct = 250 + 0.60 Ytd + 0.20 Ct
se
rv
At steady state level of consumption.
250 + 0.60Ytd
0.80
s.
Al
Pr
es
Ct
ve
rs
i
ty
= 312.5 + 0.75 Ytd .
Ytd = 500
iU
ni
When
= 312.5 + (0.75 x 500) = 687.5 MUC
fa
Ct
Ic
increase by 100,
20
04
Th
e
If
Ytd
Ct+1 = 250 + (0.60 x 600) + (0.20 x 687.5) = 747.50 MUC

Ct+2 = 250 + (0.60 x 600) + (0.20 x 747.50) = 759.50 MUC.
Consumption in the second period, Ct+2, is 759.50.
56. (e) Money multiplier = {(1 + 0.4)/(0.4 + 0.10)} = 2.8

Money supply (before increase of foreign exchange reserves) = 2.8 x H = 2.8 x (50000) = 140,000.
Computation of new CRR:
140,000 = {(1 + 0.4)/(0.4 + r)} (50000 + 500 12)
140,000 = {1.4/(0.4 + r)} 56000
0.4 + r = (1.4 x 56000/140,000)
or, r = 0.56 0.4 = 0.16 =16%.
367
Macroeconomics
02
27
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AC
04
20
04
04
57. (d) National income (NNP at FC) = wages & salaries + interest income + rental income + profit
Or, Profit = 300 180 45 30 = 45 MUC.
58. (d) NFIA = NNPMP NDPMP
NNPMP = NNPFC + Indirect Taxes Subsidies = 4,200 + 950 100 = 5,050 MUC
Thus, NFIA = 5,050 5,000 = 50 MUC.
59. (d) GDPFC = NDPMP + Depreciation Indirect Taxes + Subsidies
5000 + (800 650) 950 + 100 = 4,300 MUC.
60. (c) Personal Income (PI) (i.e. income received by the households) = NI Corporate profit +
Dividends + Transfer payments = 4,200 750 + 150 + 75 = 3,675 MUC.
61. (c) Current account balance (CAB) = Net Domestic Savings (NDS) Net Domestic Investment
(NDI)
NDS
= Retained Earnings (RE) + Budget surplus + PS
RE
= Corporate Profits Corporate Profit Tax Dividends
= 750 350 150 = 250
Thus, NDS
= 250 300 + 1,075 = 1,025 MUC.
Thus, CAB
= 1,025 650 = 375 (surplus).
62. (c) Corporate profits = Corporate profit tax + Dividends + Retained earnings
= 50 + 15 + 20 = 85.
:8
1-
31
4-
63. (c) Wages and salaries paid by the government = Factor income received by households
(Wages and salaries paid by the business sector + Dividends paid to households + Factor
income received from abroad) = 160 100 10 20 = 30.
0.25 Yd
.IS
= 300 + 0.25Yd = 0
300
= 1,200 MUC.
0.25
ht
se
rv
Yd
ed
= 300
re
BN
64. (d) At break-even level of disposable income, savings are zero.
Pr
es
s.
Al
lr
ig
65. (a) National income (NI) = Factor income received by domestic residents + Factor income
received by domestic residents from foreigners + Corporate profit taxes + Retained earnings
= 500 + 20 + 15 + 25 = 560 MUC.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
66. (c) At simultaneous equilibrium,

0.5Y = 2860 60i (or) Y = 5720 120i is equal to Y = 2600 + 400i
Or, 5720 120i = 2600 + 400i
Or, 3120 = 520i
Or, i = 6
Thus, Y = 2600 + 400(6) = 5000
When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500,
then using LM function, 400i = 5500 2600 (or) i = 7.25%
Initial investment = 800 50 (6) = 500
New investment = 800 50 (7.25) = 437.5
Change in investment = 500 437.5 = 62.5 MUC.
67. (b) Money supply = Money demand = (Transaction-cum-precautionary demand for money +
speculative demand for money)
Thus, 250 = (0.2 x 700) + (150 50i)
Or, 110 = 150 50i
Or, 50i = 40
Or, i = 0.8%.
368
Part III
68. (a) Growth rate of real GNP = {(Real GNP 2002-03/Real GNP 2001-02) 1} x 100
Real GNP 2002-03 = 6600 x 100/300 = 2200
Real GNP 2001-02 = 5000 x 100/250 = 2000
Growth rate = {(2200/2000) 1} x 100 = 10%.
69. (c) Inflation rate = (GNP deflator of current period GNP deflator of previous year) divided
by GNP deflator of previous year x 100 = (300/250 1) x 100 = 20%.
70. (c) GNP =
=
100 200
100
8000 100
7900 MUC.
04
20
04
04
Factor income received from abroad Factor income paid abroad.
GNP
NFIA
GDP + NFIA
M
AC
71. (d) Velocity of money = Y/Ms
o.
Money supply (Ms) = Money demand (Md)
ef
.N
= 0.25(600) + 150 20(3) = 240
-4
Ms = 240
27
Thus, velocity of money = 600/240 = 2.5
4-
02
(Working notes: Y = 600 = 750 50i
= (2000 - 500) {(1 + 0.2)/(0.2 + r)
.IS
= 10%.
ed
Or, r
BN
6000
= High-powered money (H) x {(1 + Cu)/(Cu + r)}
:8
72. (d) Money supply (Ms)
1-
31
Or, i = 150/50 = 3).
se
rv
re
ht
s.
Al
lr
ig
Pr
es
74. (a) Total value added in the process = Market value of the final product = 120
ty
Value added in the manufacturing stage = Total value of the good after manufacturing stage
Total cost for procuring raw-material = 50 30 = 20.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
75. (a) Multiplier = 1/(1 MPC + MPC x tax rate + MPI) = 1/(1 0.8 + 0.8 x 0.2 + 0.14) = 2.
369
Model Question Paper III

Time: 3 Hours
Total Points: 100

c.
The private investment is likely to increase because of fall in interest rate
d.
The trade deficit is likely to come down
e.
None of the above.
04
The private investment is likely to fall because of increase in interest rate
20
b.
04
The output is likely to fall
ef
.N
o.
What are economic goods?

Goods that are very expensive.
b.
Goods that are in scarce or limited supply.
c.
Goods that a country produces and then trades to another country.
d.
Goods that are vital to an individuals welfare.
e.
All of the above.
1-
31
4-
02
27
-4
a.
BN
:8
2.
a.
04
Ceteris paribus, if government expenditure increases
M
AC
1.
Change the prevailing interest rate.
b.
Lower the inflation rate.
c.
Lower the unemployment rate.
d.
e.
All of the above.
re
se
rv
ed
a.
.IS
Which of the following could be an objective of monetary policy?
Pr
es
s.
Al
lr
ig
ht
3.
For an economy operating below its potential, the effect on GDP of an increase in intended
investment will normally be
ve
rs
i
ty
4.
An increase in output is greater than the increase in investment
b.
Nothing at all, unless savings also increase at once, since investment and savings must
always be equal
Nothing at all, since consumption must go down by as much as investment goes up
d.
An increase in output equal to the amount of investment
e.
An increase in output has less than the amount of investment.
20
04
Th
e
c.
Ic
fa
iU
ni
a.
5.
Suppose that government spending rises. Assume that the economy is operating at a level
slightly below the level of potential GDP. The effect of this policy change should be
a.
Higher prices with no change in output
b.
Higher prices with higher output
c.
Higher prices with lower output
d.
Lower prices with higher output
e.
Lower prices with no change in output.
Part III
6.
Which of the following is least applicable to the concept of NDP?

A measure of output.
b.
A market value of final goods and services.
c.
The sum of all transactions involving money in an economy.
d.
A measure of income.
e.
GDP minus depreciation.
Internal balance refers to

b.
Balanced budget of government
c.
Domestic savings being equal to domestic investment
d.
Full employment level of output
e.
Aggregate demand being equal to aggregate supply.
04
20
04
04
Equilibrium in balance of payments
Which of the following statements is false?

b.
Increases in saving can cause increases in current output.
c.
Increases in investment can cause increases in output.
d.
Decreases in taxes can cause increases in output.
e.
Decreases in government spending can cause decreases in output.
02
27
-4
ef
.N
o.
Increases in output can cause increases in investment.
1-
Coins, currency and time deposits
:8
a.
31
The definition of M1 includes

Coins, currency and demand deposits
c.
Coins, currency and all bank deposits
d.
All currencies, both in banks and in the hands of the public
e.
Coins and currency only.
se
rv
ed
.IS
BN
b.
re
9.
a.
4-
8.
a.
M
AC
7.
a.
ig
ht
10. Raising the discount rate, if effective, tends to

Expand the money supply and lower interest rates
b.
Expand the money supply and raise interest rates
c.
Contract the money supply and raise interest rates
d.
Contract the money supply and lower interest rates
e.
Expand the money supply with same interest rates.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
a.
20
04
Positively related to the income level and the rate of interest
Ic
Th
e
a.
fa
11. The demand for money is

b.
Negatively related to the income level and the rate of interest
c.
Negatively related to the income level and positively related to the rate of interest
d.
Positively related to the income level and negatively related to the rate of interest
e.
None of the above.
12. Which of the following situations would you expect to see during a period of recession?
a.
Falling tax receipts.
b.
Falling corporate profits.
c.
Falling stock prices.
d.
Falling business investment.
e.
All of the above.

371
Macroeconomics
04
20
04
14. The marginal propensity to save can be described as

a. The desire to save more and consume less
b. The fraction of extra income that goes into extra savings
c. The fraction of extra income that fluctuates between consumption and savings
d. The conditioned reflex or habit to be thrifty
e. The fraction of total income that is saved.
04
13. GDP differs from NDP by

a. The amount of total taxes
b. Government expenditure on goods and services
c. Government transfer payments
d. The difference between gross investment and net investment
e. Purchases by business firms from other business firms.
M
AC
15. A tax is regressive if
The percentage of income paid as taxes increases as income increases
b.
The percentage of income paid as taxes decreases as income increases
c.
The absolute amount of tax paid is directly proportional to income
d.
The tax rate is constant
e.
None of the above.
4-
02
27
-4
ef
.N
o.
a.
1-
31
When the factor income from abroad is negative
b.
When the factor income from abroad is positive
c.
When depreciation on fixed capital exceeds income from investment
d.
When direct taxes exceed indirect taxes
e.
re
se
rv
ed
.IS
BN
:8
a.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
17. In which market simultaneous spot and forward contract are entered into by two parties?
a. Euro currency market.
b. Forward market.
c. Future market.
d. Spot market.
e. Swap market.
20
04
Th
e
Ic
fa
iU
18. When the value of output exceeds planned spending

a. There is unsold output, and the level of income will fall
b. There is unsold output, and the level of income will rise
c. There is no unsold output, and the level of income does not change
d. Any of the above can happen
19. Which of the following is/are true?
a. The tax revenue will be zero when tax rate is zero.
b. The tax revenue will be zero when tax rate is 100%.
c. The tax revenue will be highest when tax rate is 100%.
d. Laffer curve takes U shape when tax rate and tax revenue are taken on X and Y axes
respectively.
e. Both (a) and (b) above.
372
Part III
20. An
a.
b.
c.
d.
e.
increase in the marginal propensity to import

Has the same effect upon the multipliers as an increase in the MPC
Has no effect upon the multipliers
Increases the value of the multipliers
Decreases the value of the multipliers
None of the above.
04
20
04
04
21. Which of the following relationships is not true?

a. NDP at Factor Cost = GDP at Factor Cost + Depreciation.
b. GDP at Market Prices = GDP at Factor Cost + Indirect Taxes Subsidies.
c. Net Domestic Saving = Net National Saving + Retained Earnings of Foreign Companies.
d. Gross Domestic Capital Formation = Gross Fixed Investment + Change in Inventories.
c.
Leftward shift of the LM curve
d.
Leftward shift of the IS curve
e.
None of the above.
o.
Rightward shift of the IS curve
ef
.N
b.
Rightward shift of the LM curve
Nominal income and nominal interest rate
b.
Real income and real interest rate
c.
Real income and nominal interest rate
d.
Nominal income and real interest rate
e.
None of the above.
re
se
rv
ed
.IS
BN
:8
a.
1-
23. In the demand for money function we include
31
4-
02
27
-4
a.
M
AC
22. In the IS-LM model of income determination, an increase in the propensity to save leads to a
lr
ig
ht
24. When investment spending is negatively related to the rate of interest, equilibrium income in
the goods market
Is unrelated to the rate of interest
b.
Is inversely related to the rate of interest
c.
Is positively related to the rate of interest
d.
Falls as the rate of interest decreases
e.
None of the above.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
a.
Ic
fa
25. Which of the following theories is called as the Neoclassical theory of interest?
The Keynesian Theory.
b.
Liquidity Preference Theory.
c.
The Time Preference Theory.
d.
Expectations Theory.
e.
Loanable Fund Theory.
26. Which of the following is not included in gross investment?

a.
Business and residential construction.
b.
Expenditures on consumer goods.
c.
Additions to business inventory.
d.
Expenditures on machinery.
e.
All of the above.

373
Macroeconomics
27. When the actual rate of inflation turns out to be higher than expected
a.
Borrower will gain
b.
Lender will gain
c.
The gain depends on the extent of difference between the actual rate of inflation and the
expected rate of inflation
d.
e.
None of the above.
The change in autonomous spending to the change in income
c.
The change in consumption to the change in income
d.
The change in income to the change in consumption
e.
None of the above.
04
b.
20
The change in income to the change in autonomous spending
M
AC
04
a.
04
28. The value of the expenditure multiplier relates
ef
.N
o.
29. A situation in which the marginal physical productivity of labor is zero is known as
Seasonal unemployment
b.
c.
d.
e.
Voluntary unemployment.
:8
1-
31
4-
02
27
-4
a.
Revenue budget.
c.
Capital budget.
d.
Cyclical budget.
e.
None of the above.
.IS
b.
ed
Structural budget.
lr
ig
ht
re
se
rv
a.
BN
30. Which budget calculates the effect of business cycle on budget?
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
31. The IS curve shows

a. A positive relationship between rate of interest and level of income
b. A negative relationship between rate of interest and level of income
c. A positive relationship between rate of interest and level of investment
d. A negative relationship between rate of interest and level of investment
e. A positive relationship between level of income and level of investment.
32. Laffer curve shows the relationship between
a. Price level and unemployment
b. Tax rates and tax revenue
c. Interest rate and income level
d. Income and money supply
e. Demand for money and supply of money.
a. Equals the nominal rate plus the rate of inflation
b. Equals the rate of inflation minus the nominal rate
c. Equals the nominal rate minus the rate of inflation
d. Tends to increase when inflation rises
e. Is more relevant to investors than consumers.
374
e.
04
20
04
B
W
27
-4
d.
ef
.N
o.
M
AC
34. Money earned abroad and remitted to home country is

a. Included in home country GDP
b. Included in home country GNP
c. Included in both home country GDP and GNP
d. Excluded from both home country GDP and GNP
e. Included in home country GDP but excluded from home country GNP.
35. The basic difference between money stock measures M3 and M4 is that
a. M3 is more than M4
b. M2 is part of M3 where as M2 is not part of M4
c. M3 is part of M1 and M4 is not part of M1
d. M4 includes all post office deposits, where as in M3 these are not included
e. M1 is part of M4 where as M1 is not part of M3.
a. When the net factor income from abroad is negative
b. When the net factor income from abroad is positive
c. When depreciation of fixed capital exceeds gross investment
04
Part III
c.
NDP at factor cost
d.
NNP at factor cost
e.
GNP at market price.
31
b.
1-
se
rv
ed
.IS
BN
:8
a.
4-
02
37. National Income is
Foreign exchange reserves.
b.
Public debt.
c.
Wealth of a country.
d.
Inflation.
e.
Money supply.
ty
Pr
es
s.
Al
lr
ig
ht
a.
re
38. Which of the following is not a stock variable?
ve
rs
i

Equilibrium income depends solely on the position of LM curve
b.
Equilibrium income depends solely on the position of IS curve
20
04
iU
fa
Ic
Th
e
c.
ni
a.
There is no speculative demand for money
d.
Speculative demand for money is infinity
e.
40. Liquidity trap refers to a situation wherein

a.
There is too much liquidity in the economy
b.
The firms in the economy are facing credit crunch
c.
Interest rates does not decrease, no matter how much the money supply is expanded
d.
The country faces severe shortage of foreign exchange
e.
Excessive government borrowing reduces the availability of credit in the market.
375
Macroeconomics

41. The following balances are taken from balance sheet of the Central Bank of an economy.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Particulars
MUC
950
Credit to Bank
350
Government Deposits
20
5
Net worth
500
125
25
Other assets
65
The currency/deposit ratio has been ascertained as 0.20. The amount of Government money
is 10 million units of currency. Total money supply in the economy is 4000 million units of
currency. The reserve ratio imposed by the Central Bank is
a. 9%
b. 10%
c. 11%
d. 11.5%
e. 12%.
(3 points)
42. The monetary liabilities of the RBI and the government money in circulation are Rs.990
MUC and 10 MUC respectively. The currency deposit ratio is estimated to be 20%. If there is
an increase of 100 MUC in Central Bank Credit to Government, accompanied by
Government purchase of foreign exchange worth 10 MUC from the RBI, what would be the
money supply in the economy? (Assume reserve ratio is 10%)
a. 4,340 MUC.
b. 4,350 MUC.
c. 4,360 MUC.
d. 4,370 MUC.
e. 4,380 MUC.
(2 points)
43. The following relations are derived for an economy.
Saving function (S)
100 + 0.25Yd
400 15i
Tax function (T)
0.20 Y
900
0.25Y
250 50i
Money supply
600
Exports (E)
500
Import function (M)
50 + 0.10Y
All macroeconomic aggregates are in million units of currency (MUC) and the rate of interest
is in percentage. What is the budget deficit of the economy at equilibrium?
a. 200 MUC.
b. 210 MUC.
c. 215 MUC.
d. 220 MUC.
e. 225 MUC.
(3 points)
376
Part III
44. The IS function and LM function of an economy are 0.5Y = 1850 15i and 0.25Y = 350 +
50i. If exports increase by 200 and autonomous imports decrease by 30 MUC, the new
equilibrium income and budget deficit are
a.
3,800 MUC and 140 MUC
b.
c.
d.
e.
3,800 MUC and 180 MUC.
TB decreases by 30 MUC and private investment decreases by 15 MUC.
b.
TB decreases by 40 MUC and private investment decreases by 15.
c.
d.
e.
None of the above.
27
-4
ef
.N
o.
M
AC
a.
04
20
04
04
(3 points)
45. In an economy, the equilibrium functions in goods market and money market are Y = 3,700 30i
and Y = 1,400 + 200i. The investment function in the economy is 400 15i and the net
exports is 450 0.1Y. Suppose autonomous investment increased by 230 MUC, then what
would be the impact on trade balance and private investment in the economy?
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
(3 points)
46. In an economy which has a capital-output ratio of 5:1, population is expected to grow at the
rate of 2 percent p.a. If the targeted per capita real GDP growth rate is 4 percent, then the rate
of investment (i.e. investment as % of GDP) required to achieve the target is
a. 25%
b. 30%
c. 35%
d. 40%
(3 points)
47. The following information is extracted from the union budget for the year 2001-02.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
Particulars
Tax revenues
Non-tax revenues
Recoveries of loans
Other receipts (of which disinvestment proceeds committed for
redemption of public debt 2,000 cr.)
Non-plan revenue expenditure (including interest payments of
Rs.2,02,532
Non-plan capital expenditure
Planned revenue expenditure
Planned capital expenditure
The revenue and capital surplus (deficit) of the economy are
a. (Rs.1,54,850) crore and Rs.1,56,850 crore
b. (Rs.1,54,850) crore and Rs.1,54,850 crore
c. (Rs.1,56,850) crore and Rs.1,56,850 crore
d. (Rs.1,56,850) crore and Rs.1,56,850 crore
In crore of rupee
2,92,418
1,14,928
27,078
2,24,550
20,000
4,57,536
43,238
1,04,660
71,540
(3 points)
377
Macroeconomics
04
48. The borrowings and other liabilities of a hypothetical economy is Rs.2,24,550. The capital
receipts (incl. disinvestment proceeds committed for redemption of public debt Rs.2,000) is
Rs.20,000. Suppose the non-plan revenue expenditure of Rs.4,57,536 includes interest
payments of Rs.2,02,532, then the primary and fiscal deficit for the year 2001-02 are
a. Rs.22,018 and Rs.2,24,550 respectively
b. Rs.10,231 and Rs.2,24,550 respectively
c. Rs.10,011 and Rs.1,11,399 respectively
d. Rs.10,231 and Rs.1,11,399 respectively
e. Rs.10,011 and Rs.1,11,409 respectively.
(2 points)
20
04
o.
M
AC
MUC
20,000
18,000
16,000
12,000
400
1,000
100
150
50
20
1,450 Cr.
e.
1,600 Cr.
1-
d.
:8
1,400 Dr.
BN
c.
.IS
1,450 Dr.
ed
b.
se
rv
1,400 Cr.
re
a.
31
4-
02
27
-4
ef
.N
Particulars
Merchandize imports
Merchandize exports
Export of services, including travel and transportation
Import of services, including travel and transportation
Earnings of loans and investments abroad
Earnings of loans and investments in country X by foreigners
What is the current account balance of country X for the year 2001?
04
49. The following information pertains to the balance of payments of country X for the year 2001.
ig
ht
(2 points)
s.
Al
lr
50. The following information pertains to the balance of payments of country Y for the year 2001.
Pr
es
Particulars
Earnings of loans and investments abroad
ve
rs
i
ty
Earnings of loans and investments in country Y by foreigners
50
Direct investments abroad
30
Ic
Th
e
20
04
1,000
20
fa
400
iU
ni
MUC
Foreign direct investment in country Y
150
Short-term loans and investments abroad
300
Foreign short-term loans and investments in country Y

What is the capital account balance of country X for the year 2001?
a.
(150) MUC.
b.
(160) MUC.
c.
(170) MUC.
d.
(180) MUC.
e.
(190) MUC.
40
(2 points)
378
Part III
51. For Country X Gross Domestic Investment for the year 2001 is 5,000 MUC. If gross retained
earnings of the business sector are 2,000 MUC and household savings are 5,500 MUC, then
what is the budget surplus or deficit? (Assume current account balance to be 1,450 MUC)
950 MUC.
b.
(1,000) MUC.
c.
(1,050) MUC.
d.
1,100 MUC.
e.
1,150 MUC.
04
a.
04
(2 points)
ef
.N
o.
M
AC
3,870 MUC.
3,750 MUC.
3,720 MUC.
3,840 MUC.
3,920 MUC.
-4
a.
b.
c.
d.
e.
04
20
52. The current account and capital account balances of a country are 1,450 MUC (credit) and
170 MUC (debit) respectively. If money multiplier is estimated to be 3, what is the impact of
balance of payments position on the money supply in the economy?
31
4-
02
27
(1 point)
53. The following information is taken from the national income accounts of a hypothetical economy:
MUC
3,000
600
200
1,400
600
2,000
1,500
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Particulars
Gross investment
Net investment
Consumption
Government purchases of goods and services
National income
Wages and salaries
The amount of net indirect taxes collected by the government is
a. 500 MUC
b. 550 MUC
c. 600 MUC
d. 650 MUC
e. 700 MUC.
20
04
Th
e
Ic
fa
iU
ni
(2 points)
54. The following information is taken from the national income accounts of a hypothetical economy:
Particulars
MUC
3,000
Gross investment
600
Net investment
200
Consumption
1,400
Government purchases of goods and services
600
National income
2,000
The net exports made by the country is
a. 300 MUC
b. 350 MUC
c. 400 MUC
d. 450 MUC
e.
500 MUC.
(1 point)
379
Macroeconomics
55. The following information is taken from the national income accounts of a hypothetical
economy:
2,000
Wages and salaries
1,500
Proprietors income + Rental income
200
Net interest
100
Dividends
50
300
200
04
Transfer payments
04
National income
04
MUC
20
Particulars
c.
200 MUC and 1,850 MUC
d.
e.
None of the above.
o.
ef
.N
b.
02
27
-4
a.
M
AC
The amount of profits earned by the corporates and the total disposable income of the
households are
31
4-
(2 points)
:8
1-
56. The following information is extracted from National Income Accounts of a country:
BN
Particulars
se
rv
ed
.IS

Subsidies
ht
1,600
200
1,300
1,900
lr
ig
Indirect taxes
re
Net domestic investment
10,000
7,350 MUC.
b.
8,240 MUC.
c.
8,600 MUC.
d.
8,720 MUC.
e.
8,800 MUC.
(2 points)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
s.
Al
What is the value of GDP at factor cost?
20
04
57. The Government of India is expecting tax collections (net) to the tune of Rs.1,84,169 crore during
the year 2003-04. The borrowings and other liabilities are expected to be Rs.1,53,637 crore. If
the non-plan revenue expenditure of the government is Rs.2,89,384 crore (inclusive of
interest payments of Rs.1,23,223 crore), the primary deficit for the year 2003-04 is
a.
Rs.1,53,637 crore
b.
Rs.1,35,747 crore
c.
Rs.1,05,215 crore
d.
Rs. 30,414 crore
e.
None of the above.

(1 point)
380
Part III
58. In a closed two sector economy, there are 50 individuals. All the individuals have identical
consumption functions but have different disposable incomes. One of the individuals
consumption function is C = 100 + 0.7Yd. Aggregate disposable income in the economy is
50,000 MUC. The level of investment in the economy is
10,000 MUC
b.
11,000 MUC
c.
12,000 MUC
d.
13,000 MUC
e.
14,000 MUC.
04
a.
-4
ef
.N
o.
M
AC
04
20
04
(2 points)
59. If the Average Propensity to Consume (APC) in an economy is 1.05, Average Propensity to
Save (APS) in the economy would be
a. 0.05
b. 0.95
c. 1.00
d. 1.05
e. Insufficient data.
(1 point)
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
60. The annual growth rate of GDP in a country is estimated to be 5.06%. If the per capita GDP
growth rate is 2%, what is the growth rate of population?
a. 2.530%.
b. 0.395%.
c. 3.000%.
d. 4.530%.
e. 2.000%.
(1 point)
b.
80 MUC
c.
0 MUC
d.
250 MUC
e.
330 MUC.
Pr
es
580 MUC
(1 point)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
a.
s.
Al
lr
ig
ht
re
61. The money supply in an economy is 330 MUC. At equilibrium, the transaction demand
for money and the interest rate (i) in the economy are 250 and 8 percent respectively. If
the precautionary demand for money is zero, the speculative demand for money in the
economy is
20
04
62. The following are the indicators of financial development of an economy:

Financial Interrelations Ratio =
1.2
Finance Ratio
=
0.25
=
0.70
If new issues for the year are 24,000 (MUC), what would be the Net Physical Capital
Formation for the year?
a. 34,000 MUC.
b. 16,800 MUC.
c. 40,800 MUC.
d. 24,000 MUC.
e. 12,580 MUC.
(2 points)
381
Macroeconomics
63. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by
4%, the real income increases by
a.
b.
c.
d.
e.
10.0%
2.0%
1.5%
0.667%
2.5%.
(1 point)
Answer the questions 64 and 65 based on the following information:
04
04
For a two-sector economy, the consumption function is C = 100 + 0.75Y
20
And the autonomous investment in the economy is 100 MUC.
02
27
-4
ef
.N
o.
M
AC
04
64. If the current output is 800 MUC, what will be the involuntary inventory accumulation in the
economy?
a. 0 MUC.
b. 100 MUC.
c. 200 MUC.
d. 50 MUC.
e. 250 MUC.
(1 point)
se
rv
ed
.IS
BN
:8
800 MUC.
1,000 MUC.
850 MUC.
950 MUC.
1,050 MUC.
re
a.
b.
c.
d.
e.
1-
31
4-
65. Suppose the autonomous investment increases from 100 MUC to 150 MUC, what would be
the consumption at the equilibrium?
ht
(2 points)
lr
ig
66. The following information pertains to the balance of payments of a country for the year 2002-03:
s.
Al
Particulars
1,40,240
Merchandize exports
1,16,320
ve
rs
i
ty
Pr
es
Merchandize imports
2,30,010
Services rendered by foreigners to residents
1,25,234
2,000
Cash remitted by non-residents for their family maintenance
4,000
Income earned by residents on ownership of financial assets
1,000
fa
Gifts sent to non-residents by the residents
Ic
iU
ni
Services rendered to foreigners
Th
e
20
04
382
MUC
Foreign direct investment

1,00,000
If the capital account balance (credit) is 202,000 MUC, what is the change in foreign
exchange reserves?
a. 69,056 MUC.
b. 1,79,056 MUC.
c. 2,85,856 MUC.
d. 23,920 MUC.
e. 1,23,144 MUC.
(2 points)
Part III
67. At an income level of Rs.20,000 the saving is zero. If the Marginal Propensity to Save (MPS)
is 0.3, the autonomous consumption is
a.
Rs.4,900
b.
Rs.5,000
c.
Rs.6,000
d.
Rs.7,000
e.
Rs.8,000.
(1 point)
04
Questions 68 and 69 are based on the following information:
R
-4
ed
(1 point)
Pr
es
s.
Al
lr
ig
ht
re
69. GDP deflator for the year 2003 is

a. 125
b. 142
c. 140
d. 130
e. 121.
.IS
BN
:8
1-
31
4-
02
27
Rs.67,500
Rs.87,500
Rs.33,750
Rs.43,750
Rs.23,450.
se
rv
a.
b.
c.
d.
e.
o.
Price of Butter
(Rs. per unit)
15
20
Year
ef
.N
Price of Bread
(Rs. per unit)
2002
20
2003
25
68. Nominal GDP for the year 2002 is
M
AC
04
20
04
An economy produces only two commodities bread and butter. During the year 2003, it doubled
its production to 1500 units of bread and 2500 units of butter, as compared to last year. The
commodity prices in the economy during the two years are given below: (Consider 2002 as the
base year)
(2 points)
ve
rs
i
ty
70. Consider an economy described by the following equations:
ni
= 1,000 MUC
Consumption (C)
= 500 + 0.75Yd
Ic
fa
iU
Taxes (T)
20
04
Th
e
Investment demand (I)
= 1,000 MUC
= 100 50i
Transaction demand for money (Mt/P) = 0.25Y
Speculative demand for money (Ma/P) =125 50i

Money supply (Ms/P)
= 500 MUC
The amount of domestic saving in the economy is

a.
0 MUC
b.
(52.5) MUC
c.
(137.5) MUC
d.
(102.5) MUC
e.
102.5 MUC.
(3 points)
383
Macroeconomics
71. The following information is available for an economy:

Acceptable inflation rate
Money multiplier
If the real GDP is desired to grow at 5%, what is the
grow?
04
04
14.0%.
3.5%.
32.0%.
8.0%.
5.5%.
20
a.
b.
c.
d.
e.
2.0
4%
4
rate at which reserve money should
04
(2 points)
27
-4
ef
.N
o.
Rs.1,100
Rs.1,200
Rs.800
Rs.1,000
None of the above.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
b.
c.
d.
e.
M
AC
72. A government employee received a cheque for Rs.1,200 drawn on the RBI. When the cheque
is credited to the employees account, high-powered money in the economy increases by
384
(1 point)
Model Question Paper III

Suggested Answers
1. (b) Other things being equal, increase in government expenditure increases the interest rates
in the economy, which in turn crowds out private investment.
04
2. (b) Economic goods are those goods that are scare or limited in supply.
04
20
04
3. (e) Monetary and fiscal policies are aimed at reaching macroeconomic objectives. Thus
objectives of monetary and fiscal policies are similar to macroeconomic objectives. All the
options given are objectives of monetary policy. Hence, the answer is (e).
o.
M
AC
4. (a) For an economy operating below its potential, the effect on GDP of an increase in
intended investment will normally be greater than the increase in investment due to multiplier
effect.
ef
.N
5. (b) Increase in government spending is an expansionary fiscal policy which increases the
price level and output in the economy.
02
27
-4
6. (c) The sum of all transactions involving money in an economy is least applicable to the
concept of NDP.
:8
1-
31
4-
7. (d) When government spending is used as a policy instrument in order to achieve full
employment, it is called internal balance.
ed
.IS
BN
8. (b) Savings reduces the consumption expenditure, which is a basic component of total output
(income). Hence, increase in savings reduces the consumption, which in turn pull the income
level down.
se
rv
9. (b) M1 = Currency with the public + Demand deposits with the banks.
lr
ig
ht
re
10. (c) Raise in discount rate discourages banks to rediscount their bills with the RBI, which
leads to contraction in money supply in the economy. Reduction of money supply pushes the
interest rates up in the market.
ty
Pr
es
s.
Al
11. (d) Demand for money increases (decreases) with the increase (decrease) in the level of
income. On the other hand, increased (decreased) interest rate tend to reduce (increase) the
demand for money.
iU
ni
ve
rs
i
12. (e) When these is recession in the economy, the tax receipts will come down, there will be
decrease in corporate profit, stock prices will start falling, and these will not be any new
business investment.
20
04
Th
e
Ic
fa
13. (d) GDP = NDP + Depreciation (or) GDP NDP = Depreciation. Similarly, on the other
hand, gross investment Net investment = Depreciation. Hence, difference between GDP and
NDP is equal to difference between gross investment and net investment.
14. (b) The Marginal Propensity to Save (MPS) can be described as the fraction of extra income
that goes into extra savings.
15. (b) A tax is regressive if potentials of income paid taxes decreases as income increases.
16. (e) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies (or) GDP at
factor cost = GDP at market price + Subsidies Indirect taxes. Hence, if GDP at factor cost
exceeds GDP at market prices subsidies must be greater than the indirect taxes.
17. (e) In swap market, simultaneous spot and forward contract are entered into by two
counterparties.
18. (a) When the output exceeds the spending there will naturally be some unsold output. As
unsold output is not included in income, the income level decreases in the economy.
Macroeconomics
19. (e) Laffer curve shows the relation between total tax revenue and tax rates. It shows that
increase in tax rates up to a certain level leads to an increase in tax revenue and latter results
in decrease of tax revenue. According to Laffer curve, tax revenue will be zero when tax rate
is at zero or at 100%.
21. (a) GDP at factor cost (market prices) Depreciation = NDP at factor cost (market prices).
04
22. (d) In the IS-LM model of income determination, an increase in the propensity to save leads
to the leftward shift of the IS curve.
M
AC
04
20
04
23. (b) The demand for money is the demand for real money balances real balances for
short because people hold money for what it will buy. Demand for money depends upon
the real income and real interest rate. It depends on the level of real income because
individuals hold money to pay for their purchases, which in turn, depend on the income. The
demand for money also depends upon the cost of holding money, which is indicated by real
interest rate.
02
27
-4
ef
.N
o.
24. (b) When investment spending is inversely (negatively) related to the interest rate, a fall in
the interest rate induces an increase in investment expenditure and also possibly consumption
expenditure, which in turn lead to increase in the level of aggregate demand and ultimately
the income. This shows an inverse relationship between rate of interest and income in the
goods market.
31
4-
25. (d) Rational expectations theory is called neo-classical theory of interest.
BN
:8
1-
26. (b) Expenditure on consumer goods comes under consumption expenditure and hence does
not included in gross investment.
ed
.IS
27. (a) The borrower will gain and lenders will loss, as the purchasing power of money will
decrease by a greater amount than expected.
re
se
rv
28. (a) The value of expenditure multiplier relates the change in income (Y) as a result of
change in the autonomous spending (J).
s.
Al
lr
ig
ht
29. (c) Disguised unemployment refers to a situation where more than the required number of
people are visibly occupied in some work contributing nothing to the output.
Pr
es
30. (d) Cyclical budget calculates the effect of business cycle on budget. It measures the changes
in the revenue expenditure and deficit that arise due to business fluctuations.
fa
iU
ni
ve
rs
i
ty
31. (b) IS curve shows various combinations of rate of interest and level of income where the
goods market is in equilibrium. There is a negative relation between rate of interest and level
of income because of negative relation between rate of interest and consumption and
investment expenditure.
Th
e
Ic
32. (b) Laffer curve shows the relationship between tax rates and tax revenue.
20
04
33. (c) Nominal rate of interest = Real rate of interest + Inflation.

Therefore the answer is (c).
34. (b) Money earned abroad and remitted to home country is factor income received from
abroad, which is included in GNP of the home country and GDP of the host country.
35. (d)
M2 = M1 + Post office savings Bank Deposits
M3 = M1 + Time Deposits
The answer is (d).
386
Part III
36. (e) GDPFC = GDPMP Indirect taxes + Subsidies

If GDPFC > GDPMP, Subsidies > Indirect taxes.
37. (d) NNPFC is also called a National Income.
38. (d) A variable is defined as a stock variable if it is measured at a point of time and as a flow
variable if it is measured over a period of time. Of all the variables listed, only inflation is
measured over a period of time and hence is a flow variable.
39. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is
A
04
04
1 b(1 t)
20
Y=
04
Hence, equilibrium income depends on the position of IS curve only.
ef
.N
o.
M
AC
40. (c) Liquidity trap is a situation where the demand for money is infinitely elastic. At the
current interest rate the public is willing to absorb any amount of money. Hence, increase in
money supply will not decrease the rates of interest. Other options are not correct.
Part B: Problems
27
-4
41. (b)
4-
02
High powered money = Monetary Liabilities of RBI + Government Money
31
Monetary liabilities of RBI = Financial Assets + Other Assets Non-monetary liabilities.
65 MUC.
se
rv
Other Assets
.IS
950 + 350 + 125 + 25 = 1,450 MUC
ed
BN
:8
1-
Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial sector +

Net Foreign Exchange Assets
re
Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net

worth
20 + 5 + 500 = 525 MUC.
ig
ht
s.
Al
lr
Monetary liabilities = 1,450 + 65 525 = 990 MUC.
Pr
es
Government money = 10 MUC.

High powered money = 990 + 10 = 1,000 MUC.
ve
rs
i
ty
Money Supply = H x m
1 + Cu
Cu + r
fa
iU
ni
m = money multiplier =
20
04
Th
e
Ic
4,000 = 1,000 m
m=
4,000
= 4.
1,000
1 + Cu
Cu + r
=4
1+ 0.2
=4
0.2 + r
1.2 = 0.8 + 4r
r=
1.20 0.8
= 0.10 = 10%.
4
387
Macroeconomics
42. (c)
Money supply (Ms) = High-powered money (H) x Money Multiplier (m)
= [(990 + 10) + 100 10] [(1 + 0.2)/(0.2 + 0.1)] = 1,090 x 4 = 4360 MUC.
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
31
1:8
BN
350 + 50i
= 1,400 + 200i. LM function
0.25
.IS
4-
600 = 0.25Y + 250 50i

0.25Y = (600 250) + 50i
Y
04
43. (d)
= 100 + 0.25Yd
Yd = Y T
= Y 0.20Y = 0.80Y
C = 100 + 0.75 0.80Y = 100 + 0.6Y
Goods market equilibrium:
Y = C+I+G+EM
= 100 + 0.6Y + 400 15i + 900 + 500 50 0.10Y
Y = 1,850 + 0.5Y 15i
Y = 3,700 30i IS function
Money market equilibrium:
Ms
= Md
Md
= Mt + Ma
= 0.25Y + 250 50i
ed
Both the markets will be simultaneously in equilibrium when, IS = LM
re
se
rv
3,700 30i = 1,400 + 200i

230i = 3,700 1,400 = 2,300
s.
Al
lr
ig
ht
i = 10%
Y = 3,700 30i = 3,400 MUC.
Budget deficit = Government expenditure Tax revenue
Pr
es
Taxes = 0.20Y = (0.20 3,400) = 680 MUC
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Budget deficit = 900 680 MUC = 220 MUC.

44. (a)
0.5Y = 1850 15i and 0.25Y = 350 + 50i.
When E increase by 200 and imports decrease by 30, the IS function will be
0.5Y = 1,850 + 200 ( 30) 15i
0.5Y = 2,080 15i
Or, Y = 4,160 30i
LM function 0.25Y = 350 + 50i can be written as Y = 1,400 + 200i
By equating IS & LM functions,
4,160 30i
= 1,400 + 200i
2,760
= 12%
230
= 4,160 (30 12) = 3,800 MUC.
= (0.20 3,800) = 760 MUC
Y
Tax revenue
Budget deficit = 900 760 = 140 MUC.
388
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
45. (a) Before increase of autonomous investment:

By equating IS and LM functions,
3,700 30i = 1,400 + 200i
2,300 = 230i
i = 10
When i =10, then Y = 3,700 30(10) = 3,400 MUC.
Thus, trade balance = 450 0.1(3,400) = 110 (surplus)
Investment
= 400 15(10) = 250 MUC.
When autonomous investment increases by 230 MUC, the IS function would become
Y = 3,700 30i + 230 = 3,930 30i
By equating IS and LM functions,
At equilibrium,
3,930 30i = 1,400 + 200i
2,530 = 230i
i = 11%
When i =11, then equilibrium income
Y = 3,930 30(11) = 3,600.
If Y = 3,600, then trade balance = 450 0.1Y = 450 0.1(3,600) = 90.
Private investment = 400 15(11) = 235.
Thus, trade balance decrease by 110 90 = 30 and investment decrease by 250 235 = 15.
04
Part III
.IS
ed
(1 + g)
(1 + p)
g = GDP growth rate
re
Where,
se
rv
Per capita GDP growth rate
BN
:8
46. (b)
ht
P = growth rate of population

= 0.04
Pr
es
1 + g = 1.04 1.02
s.
Al
lr
ig
To achieve the targeted per capita GDP growth rate of 4%.
= 0.0608 = 6.08%
ty
ve
rs
i
Given COR of 5, required investment is
iU
ni
6.08 5 = 30.4% of GDP.
fa
Alternative approach:
Th
e
Ic
Target per capita real GDP growth = 4% p.a.
20
04
Expected population growth
= 2.0% p.a.
Growth required in GDP to achieve target per capita GDP growth = 4 + 2 = 6% p.a.
Capital output ratio = 5:1
The required rate of investment as a percentage of GDP = 5 6 = 30% approx.
47. (b)
Tax revenues
Non-tax revenues
Recoveries of loans
In crore of
rupee
2,92,418
1,14,928
27,078
2,24,550
389
Macroeconomics
In crore of
rupee
Other receipts (of which disinvestment proceeds committed
for redemption of public debt is 2,000 cr.)
Non-plan revenue expenditure (including interest
payments of Rs.2,02,532)
20,000
4,57,536
43,238
1,04,660
71,540

20
04
04
Revenue surplus/Deficit = Revenue receipts Revenue expenditure = [Tax revenues

+ Non-tax revenues] [Planned revenue expenditure + Un-plan revenue expenditure]
04
= 2,92,418 + 1,14,928 4,57,536 1,04,660 = Rs.(1,54,850) crore.
ef
.N
o.
M
AC
Capital surplus/Deficit = Recoveries of loans + Borrowings and other liabilities + Other

receipts Non-plan capital expenditure Plan capital expenditure Disinvestment proceeds
= 27,078 + 2,24,550 + 20,000 43,238 71,540 2,000 = Rs.1,54,850 crore.
-4
= Borrowings and Liabilities = Rs.2,24,550 crore
27
Fiscal Deficit
48. (a)
4-
02
Primary Deficit = Fiscal Deficit Interest payments = 2,24,550 2,02,532 = Rs.22,018 crore.
1-
31
49. (d)
Credit
Debit
18,000
20,000
(2,000)
16,000
12,000
4,000
400
1,000
(600)
150
100
50
34,550
33,100
1,450
:8
Item
BN
I. Merchandize
se
rv
ed
.IS
II. Invisibles
(a + b + c)
Net
re
a. Services
lr
ig
c. Transfers
ht
b. Income
Pr
es
s.
Al
Current account balance (I + II)
ty
50. (c)
I. Foreign investment
II. Loan capital
Capital account balance (I + II)
Credit Debit
150
30
Net
120
60
350 (290)
210
380 (170)
Th
e
Ic
fa
iU
ni
ve
rs
i
Item
20
04
51. (c)
Gross Domestic Savings (GDS) = GDI + Current Account Balance (CAB)
GDS =
=
Household savings + Gross retained earnings of business sector + Budget surplus

of government
5,500 + 2,000 + BS = 7,500 + BS
GDI = 5,000 MUC

CAB = 1,450 MUC
7,500 + BS = 5,000 + 1,450

BS = 6,450 7,500
= 1,050 MUC (Budget deficit).
390
Part III
52. (d) Change in money supply (Ms) = Money multiplier x Change in high powered money (H)
Since the overall BoP position is a surplus of 1,280 MUC (1,450 170), forex reserves
increase by the same amount, which leads to increase in H by 1,280 MUC.
Ms = 3 1,280 = 3,840 MUC.
53. (c) NNP at Market Prices = GNP at Market Prices depreciation

Depreciation
= Gross investment Net investment

= 600 200 = 400 MUC
04
= NNP at market prices National income
20
Net indirect taxes
04
NNP at market prices = 3,000 400 = 260
B
W
Net Exports = GNPMP (C + I + G)
M
AC
54. (c)
04
= 2,600 2,000 = 600 MUC.
= 3,000 (1,400 + 600 + 600) = 3,000 2,600 = 400 MUC.
ef
.N
o.
55. (e) Corporate profits =
27
-4
National income (Wages and salaries + Rental income + Proprietors income + Net
interest)
4-
2,000 200 + 300 + 50 = 2,150 MUC.
:8
National income Corporate profits + Transfer payments + Dividends
31
Personal income =
02
2,000 (1,500 + 200 + 100) = 2,000 1,800 = 200 MUC.
1-
BN
Personal disposable income = Personal income Personal taxes
ed
.IS
= 2,150 200 = 1,950 MUC.
se
rv
56. (c)
re
NDPMP + Depreciation = GDPMP = 10,000 + (1,600 1,300) = 10,300 MUC
= Fiscal deficit Interest payment
s.
Al
57. (a) Primary deficit
lr
ig
ht
GDPMP Indirect taxes + Subsidies = GDPFC = 10,300 1,900 + 200 = 8,600 MUC.
Pr
es
= Rs.1,53,637 Cr. 1,23,223 Cr. = Rs.30,414 Cr.
ve
rs
i
ty
Where Fiscal deficit = Borrowings and other liabilities of the government

= Rs.1,53,637 Cr.
iU
ni
58. (a) At equilibrium, Y = C + I = C + S
Th
e
Ic
fa
Aggregate consumption function = (100 x 50) + 0.7Yd = 5,000 + 0.7Yd = 5,000 +

0.7(50,000) = 40,000. Thus, Investment (I) = Saving (S) = 50,000 40,000 = 10,000 MUC.
20
04
59. (a) APC + APS = 1

Thus, APS = 1 APC = 1 1.05 = 0.05.
60. (c) Per capita GDP growth rate = (1 + g)/(1 + p) 1; where g = growth rate of GDP and
p = growth rate of population.
= (1 + 0.0506)/(1 + 0.02) 1 = 0.03 or 3%.
61. (b) At equilibrium, Supply of money = Demand for money
Demand for money = Transaction demand for money + Speculative demand for money
+ Precautionary demand for money
Or, speculative demand for money = 330 250 0 = 80 MUC.
391
Macroeconomics
62. (a) Intermediation Ratio = Secondary issues/New issues

Or, secondary issues = Intermediation ratio x New issues = 0.7 x 24,000 = 16,800 MUC
Total issues = New issues + Secondary issues = 24,000 + 16,800 = 40,800 MUC
Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF)
Or, Net Physical Capital Formation (NPCF) = Total issues/Financial Interrelations Ratio
= 40,800/1.2 = 34,000 MUC.
63. (b) Growth rate of Real income = Nominal income Price level = 6% 4% = 2%.
04
04
64. (a) When output (income) = 800, aggregate demand = C + I = 100 + 0.75(800) + 100 = 800.
When AD = Y, there will be no involuntary inventory accumulation in the economy.
04
20
65. (c) Multiplier = 1/MPS (in a two-sector economy)
Thus, multiplier = 1/0.25 = 4
M
AC
If autonomous investment increases to 150 (i.e. 50), then the income increases by 50 x 4 = 200.
That means, new Y = 800 + 200 = 1000.
ef
.N
o.
Therefore, consumption = 100 + 0.75(1000) = 850 MUC.
66. (c) Change in foreign exchange reserves = Current account balance + Capital account balance
27
-4
Current account balance = (116,320 + 230,010 + 4000 + 1000) - (140,240 + 125,234 + 2000)
= 351330 267474 = 83856 i.e. current account surplus (Credit)
4-
02
Thus, change in foreign exchange reserves = 83856 + 202,000 = 285856 MUC.
1-
31
67. (c) When saving is zero, Y = C + S = C + I; C = Y = Rs.20,000
.IS
ed
se
rv
If MPS = 0.3, MPC = 1 0.3 = 0.7.

Thus, 20,000 = a + (0.7 x 20,000)
BN
:8
C = a + bY; where a = Autonomous Consumption, and b = Marginal Propensity to Consume

(MPC)
re
a = 20,000 14,000 = Rs.6,000.
s.
Al
lr
ig
ht
68. (c) Nominal GDP for 2002 = (Quantity of bread in 2002 x Price of bread in 2002) +
(Quantity of butter in 2002 x Price of butter in 2002) = (750 x 20) + (1250 x 15) = 15,000 +
18,750 = Rs.33,750.
Pr
es
69. (d) Real GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2002) + (Quantity of
butter in 2003 x Price of butter in 2002) = (1500 x 20) + (2500 x 15) = Rs.67500.
fa
iU
ni
ve
rs
i
ty
Nominal GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2003) + (Quantity of
butter in 2003 x Price of butter in 2003) = (1500 x 25) + (2500 x 20) = 37500 + 50000
= 87,500.
Th
e
Ic
GDP deflator =
Nominal GDP
100
Real GDP
20
04
= (87500/67500) x 100 = 1.296 x 100 = 129.6 or 130.
70. (c) Goods market will be in equilibrium when Y = AD = C + I + G
= 500 + 0.75(Y T) + 100 50i + 1000

= 1600 + 0.75(Y 1000) 50i
= 850 + 0.75Y 50i

0.25Y = 850 50i
.. IS curve
Money market will be in equilibrium when:

Money supply (Ms) = Money demand (Md)
500 = 0.25Y + 125 50i
375 = 0.25Y 50i
392
Part III
0.25Y = 375 + 50i
.. LM curve
Thus, at simultaneous equilibrium,

850 50i = 375 + 50i
475 = 100i
i = 4.75
When i = 4.75, 0.25Y = 375 + 50 (4.75) = 612.5
Or, Y = 612.5/0.25 = 2450.
i.
Private saving = Y T C = 2450 1000 [500 + 0.75(2450 1000)]

Public saving = T G = 1000 1000 = 0
iii.
Domestic saving = Private saving + Public saving = (137.5) + 0 = (137.5) MUC.
04
ii.
20
04
04
= 1450 [500 + 1087.5] = (137.5)
M
AC
71. (b) Rate of growth of money stock (gM) = a.gY + gP

Where, a = income elasticity of demand for real balances
ef
.N
o.
gY = expected rate of growth in real GDP

gP = acceptable rate of inflation
-4
Thus, gM = (2 x 5) + 4 = 14%
02
27
Given money multiplier is 4,
4-
Rate of growth of reserve money = 14/4 = 3.5%.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
72. (b) When a cheque is drawn on the central bank, the money in circulation with public
increases that in turn increases the monetary liabilities of the central bank. Since monetary
liabilities of the central bank and government money form part of high-powered money, it
also increases by the same amount for a given increase in monetary liabilities of the central
bank. Hence the answer is (b).
393
Model Question Paper IV

Time: 3 Hours
Total Points: 100


Which of the following statements is correct?
b.
A change in an exogenous variable is classified as an autonomous change.
c.
A variable is exogenous when its value is determined by forces within the model.
d.
A variable is autonomous when its value is determined by forces within the model.
e.
None of the above.

Saving equals investment
b.
Consumption plus investment equals the value of output
c.
Planned saving equals planned investment
d.
Aggregate spending equals the revenues of the business sector
e.
GDP/GNP
d.
GNP/GDP
e.
None of the above.
ed
se
rv
re
s
ht
ig
lr
A depletion of inventories.
b.
An increase in recruiting labor force.
c.
An upward movement of the price level.
d.
Requests for wage increases.
e.
All of the above.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
Ic
fa
Velocity of money is given by

a.
ef
.N
R
-4
27
02
31
c.
1-
Nominal GDP/real GDP
:8
b.
BN
Real GDP/nominal GDP
.IS
a.
If the level of aggregate demand were greater than the level of aggregate supply in the
economy, which of the following choices could also be seen?
5.
6.
o.
a.
GDP deflator is given by
4.
04
20
04
B
M
AC
Equilibrium occurs in a two-sector model when
3.
04
A variable is endogenous when its value is determined by forces outside the model.
4-
2.
a.
1.
Money supply/GDP
b.
Money supply/investment
c.
Investment/money supply
d.
GDP/money supply
e.
None of the above.
Which of the following is not a function of money?

a. Medium of exchange.
b. Unit of account.
c. Supply of reserves.
d. Store of value.
e. A standard of deferred payments.
Part III
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
7. Which of the following cannot be identified as a basic trend of economic development?

a. Population has grown less rapidly than the growth of the capital stock.
b. There has been a strong upward trend in real wage rates.
c. The percentage of GDP used to finance investment in physical capital has been roughly
constant.
d. The rate of profit has been gradually but steadily declining.
8. During the course of typical business fluctuations, there is more variation in
a. Industrial price than in real industrial output
b. Consumer goods production than in capital goods production
c. Agricultural production than in non-agricultural production
d. Durable goods production than in non-durable goods production
e. Government production than in private production.
a. Investment and interest rates are negatively related.
b. Investment and interest rates are positively related.
c. An increase in government expenditure is likely to cause a drop in income.
d. Both (a) and (c) above.
10. Policies directed at stimulating exports can influence
a. The domestic employment
b. Price stability
c. The growth of actual GDP relative to potential GDP
d. The foreign trade balance
11. Net investment is derived from gross investment by
Subtracting inventory costs from gross investment
b.
Adjusting gross investment for inflation
s.
Al
lr
ig
ht
a.
Subtracting profits retained by firms from gross investment

Reducing gross investment by the rupee value of business ventures that failed during a
stated period
e.
Subtracting capital depreciation.
ni
ve
rs
i
ty
Pr
es
c.
d.
iU
12. Factors affecting consumption include

Income
Ic
fa
a.
Wealth
c.
Expectations
20
04
Th
e
b.
d.
e.
All of the above.
13. Which of the following would be a liability of a commercial bank?

a.
Deposits in the bank.
b.
Loans made by the bank to individuals.
c.
Loans made by the bank to other banks.
d.
Bonds purchased by the bank.
e.
Investments made in mutual funds.
395
Macroeconomics
14. When a Central Bank wishes to increase the quantity of money held by the public, it
a.
Sells bonds
b.
Buys bonds
c.
Sells goods or services
d.
Buys goods or services
e.
None of the above.

There is an imperfect relationship between consumption and disposable income
b.
There is no relationship between consumption and disposable income
c.
Consumption spending lags the receipt of disposable income by one period
d.
The receipt of disposable income lags consumption spending by one period
e.
None of the above.
M
AC
04
20
04
a.
04
15. When Ct = f(Yd, t 1)
Primary deficit.
ef
.N
e.
Revenue deficit.
-4
d.
27
Capital deficit.
02
c.
4-
Fiscal deficit.
31
b.
1-
Budget deficit.
:8
a.
o.
16. Which of the following is the largest deficit for the government?
ed
.IS
BN
17. Which of the following model explains that people can quickly and easily adjust their living
standards upwards but downward adjustment is very difficult?
Relative Income Hypothesis.
b.
Permanent Income Hypothesis.
c.
Life Cycle Hypothesis.
d.
Inventory Theoretic Approach.
e.
Expectation Hypothesis.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
18. When excise tax on cigarettes was hiked, it was found that total expenditure on cigarettes
increased. A possible explanation is that
The tax increase was not passed onto consumer
b.
People smoke more when cigarette prices go up
20
04
iU
fa
Income elasticity of demand for cigarettes is very high
Ic
Th
e
c.
ni
a.
d.
Demand for cigarettes is price inelastic
e.
None of the above.
19. Which of the following is true of I-S curve? When transfer payments are increased,
396
a.
I-S curve will shift to the left
b.
Slope of the I-S curve will increase
c.
I-S curve will shift to the right
d.
Slope of the I-S curve will decrease
e.
I-S curve will not affect.
Part III
20. GDP is not a very good measure of economic prosperity because

a.
The expenditure and production methods of estimating GDP yield different results
because of conceptual problems
b.
It does not include non-monetized transactions/activities
c.
It is purely a monetary measure
d.
It does not include environmental degradation
e.
04
21. The impact of a recession is likely to have a stronger impact on the economy when
MPC is larger
b.
MPC is smaller
c.
MPS is larger
d.
MPS is smaller
e.
ef
.N
o.
M
AC
04
20
04
a.
20
04
Th
e
Ic
fa
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i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
22. In an inflationary period, an appropriate policy for the Reserve Bank of India would be to
a. Sell government securities in the open market
b. Encourage commercial banks to increase their loans
c. Lower the cash reserve ratio
d. Lower the bank rate
23. In an economy during a particular year, GDP exceeds GNP. This must imply that
a. Indirect taxes exceed subsidies
b. Net factor income from abroad is negative
c. Government tax revenue exceeds its expenditure
d. The merchandize trade balance is in surplus
e. Subsidies exceed indirect taxes.
24. A decline in foreign exchange reserves of a country, other things remaining the same will
a. Cause a capital inflow into the country
b. Cause a contraction of money supply in the country
c. Force the country to borrow from foreign countries
d. Increase the prices of imported goods
25. When I sell a share for Rs.250 which I had bought for Rs.130
a. National income goes up
b. Money supply goes up
c. National income goes down
d. High-powered money increases
a.
b.
c.
d.
e.
There is net debit balance in the merchandize account

There is net credit balance in the merchandize account
Decrease in Foreign Exchange Reserves
Increase in Foreign Exchange Reserves.
397
Macroeconomics
04
20
04
02
27
-4
ef
.N
o.
M
AC
28. If the RBI raises the reserve ratio

a. High-powered money and money supply must increase
b. High-powered money will increase and money supply will decrease
c. Both high-powered money and Money supply will decrease
d. High-powered money will remain unchanged and money supply will decrease
e. Outstanding bank credit will increase.
a. High inflation
b. Low inflation
c. High unemployment
d. Low unemployment
e. Both (a) and (c) above.
04
27. Dynamic multipliers occur when

a. The assumption of ceteris paribus is dropped
b. The economy is not in equilibrium
c. Consumption is unrelated to disposable income
d. There is a lagged response between consumption and disposable income
31
GDP takes into account both transfer payments and leisure time.
GDP takes into account transfer payments, but not leisure time.
GDP takes into account leisure time, but not transfer payments.
GDP takes into account neither transfer payments nor leisure time.
GDP takes into account both the services of a housewife and services of a driver
engaged by a company.
31. If the marginal propensity to consume is zero, a decrease in investment would lead to
a. A decrease in the equilibrium level of income by the same amount
b. No change in the equilibrium level of income
c. An unending downward spiral in equilibrium level of income
d. An unending upward spiral in the equilibrium level of income
e. An increase in the equilibrium level of income.
32. The government decreases both its expenditure and tax receipts by Rs.10 billion. This would
a. Reduce the equilibrium level of income
b. Increase the equilibrium level of income
c. Reduce the equilibrium level of income only if the government had previously been
running a deficit
d. Leave the equilibrium level of income unaffected
e. Increase the equilibrium level of income only if the government had previously been
running a surplus.
33. The money payments which are not due to any current productive activity on the part of
income receiver is called
20
04
Th
e
Ic
fa
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i
ty
Pr
es
s.
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re
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ed
.IS
BN
:8
1-
a.
b.
c.
d.
e.
4-
a.
b.
c.
d.
e.
398
Plan expenditure
Transfer payments
Consumption expenditure
Past expenditure
Either (b) or (d) above.
Part III
34. Which of the following is/are not considered in the calculation of national income?
Teaching in a class.
ii.
Shirt stitched by a father for his son.
iii.
Patient attended to by a doctor.
iv.
Services of a housewife.
a.
b.
Both (i) and (iv) above.
c.
Both (ii) and (iv) above.
d.
e.
All (i), (ii), (iii) and (iv) above.
04
20
04
04
i.
35. J M Keynes held that changes in the money supply

Affect aggregate demand mainly by causing changes in the interest rate
b.
Affect aggregate demand mainly by causing changes in the price level
c.
Affect aggregate demand mainly by causing changes in the velocity of money
d.
Alone cannot affect output or employment
e.
All of the above.
27
-4
ef
.N
o.
M
AC
a.
4-
02
36. National product at market prices is higher than national product at factor cost by the amount of
Indirect taxes
b.
Subsidies
c.
Indirect taxes subsidies
d.
Indirect taxes + subsidies
e.
Depreciation.
se
rv
ed
.IS
BN
:8
1-
31
a.
re
37. Which method is used to compute national income in India?

Output method.
b.
Income method.
c.
Expenditure method.
d.
All of the above.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
ni
38. The best single indicator of the standard of living is

Normal GNP
Real GNP
20
04
Th
e
Ic
b.
fa
iU
a.
c.
Per capita Normal GNP
d.
Per capita Real GNP
e.
None of the above.
39. Large government borrowings to finance its deficit will

a.
Increase the supply of loanable funds
b.
Exert downward pressure on interest rates
c.
Have no impact on interest rates
d.
Put upward pressure on interest rates
e.
Makes it easier for the commercial sector to borrow money.
399
Macroeconomics
40. If the Average Propensity to Save (APS) is negative, then the Average Propensity to
Consume (APC) is
a.
Negative
b.
Zero
c.
Positive but less than one
d.
One
e.
Greater than one.
04
20
04
7,000
Credit to Banks
4,000
B
W
ef
.N
o.
Million units of
currency (MUC)
M
AC
Particulars
04
41. The following balances are taken from the Balance Sheet of the Central Bank of a country.
500
Government Deposits
25
27
-4
1,000
4-
02
Net worth
31
:8
1-
BN
Other assets
ed
.IS
Deposits of banks
se
rv
Other Deposits
2,000
11,000
100
6,000
600
85,500 MUC.
c.
90,400 MUC.
ty
95,300 MUC.
e.
96,200 MUC.
fa
iU
ni
ve
rs
i
d.
(3 points)
Th
e
Ic
42. The net worth of a Central Bank is 1000 and the money supply in the economy is 90,400. The
monetary liabilities of the Central Bank are 22,600. Because of intervention in the foreign
exchange market, net worth of the central bank is expected to erode by 50% in the next
period. If the Central Bank desires to maintain the current level of money supply by changing
the reserve ratio, what should be the new reserve ratio? (Assume currency/deposit ratio to be
24%)
a. 7.06%.
b. 6.59%.
c. 6.51%.
d. 7.69%.
e. 8.01%.
(3 points)
20
04
lr
b.
s.
Al
80,600 MUC.
Pr
es
a.
ig
ht
re
The currency/deposit ratio has been ascertained as 0.24. Reserve ratio imposed by the central
bank is 7%. The amount of Government money is 25 million units of currency. What is the
money supply in the economy?
400
Part III
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
43. The consumption function estimated for an economy is Ct = 80 + 0.6 Ytd + 0.2 Ct 1. If Ytd
increase by 100 and remains at that level, what is the change in steady state level of
consumption?
a. Consumption increases by 55.
b. Consumption decreases by 55.
c. Consumption increases by 75.
d. Consumption decreases by 75.
e. Consumption increases by 100.
(2 points)
44. The following relations are estimated for an economy:
Savings function
(S) = 380 + 0.35Yd + 10i
Tax function
(T) = 0.30Y
Investment function
(I) = 300 + 0.15Y 50i
Transfer payments
(R) = 200
Government Expenditure (G) = 1,200
Exports
(E) = 900
Import function
(M) = 50 + 0.105Y
Money Supply
(Ms) = 1,000
Transaction Demand
for Money
(Mt) = 0.25Y
Speculative Demand
for Money
(Ma) = 350 100i
(All macroeconomic aggregates are in million units of currency (MUC) and the rate of
interest is in percentage.)
What is the equilibrium level of income of the economy?
a. 3,000 MUC.
b. 4,000 MUC.
c. 5,000 MUC.
d. 6,000 MUC.
e. 7,000 MUC.
(3 points)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
45. The IS and LM functions in an economy are 0.5Y = 2,860 60i and 0.25Y = 650 + 100i. The
government expenditure (G) during the period is 1,200. If the government desires to increase
the equilibrium output by 10% in the next period, it must increase its expenditure (G) by
a. 425 MUC
b. 475 MUC
c. 350 MUC
d. 575 MUC
e. 325 MUC.
(3 points)
46. The IS function in an economy is estimated to be Y = A 120i. The transaction demand for
money (Mt) and speculative demand for money (Ma) are 0.25Y and 350 100i. The
equilibrium income (output) of the economy is 5000 MUC. The government directed the
Central Bank to undertake appropriate monetary policy to increase the equilibrium output by
10%. Suppose the central bank wants to achieve the goal by increasing the money supply
(Ms), then it should increase the supply of money to
a. 1,542 MUC
b. 1,323 MUC
c. 1,252 MUC
d. 1,444 MUC
(3 points)
401
04
20
04
B
ef
.N
o.
M
AC
47. The following information is taken from Union Budget for the year 2002 03:
(Rs.crore)
Tax Revenue (Net)
1,72,965
Non-tax Revenue
72,140
Recoveries of Loans
17,680
12,000
Borrowings & Other Liabilities
1,35,524
Non-plan revenue expenditure
2,70,169
(Of which, interest payments is Rs.1,17,390 crore)
26,640
70,313
43,187
The revenue and capital deficits of the country for the year 2002-03 are
a. Rs.95,377 crore (deficit) and Rs.95,377 crore (surplus)
b. Rs.95,377 crore (deficit) and Rs.90,229 crore (surplus)
c. Rs.92,389 crore (deficit) and Rs.95,377 crore (surplus)
d. Rs.92,389 crore (deficit) and 90,229 crore (surplus)
04
Macroeconomics
2.6% of GDP.
e.
2.8% of GDP.
BN
d.
.IS
2.1% of GDP.
ed
c.
se
rv
1.3% of GDP.
re
b.
1.8% of GDP.
ht
a.
:8
1-
31
4-
02
27
-4
(3 points)
48. In an economy domestic savings income ratio is 25% and the population is expected to
grow at the rate of 1.5%. Incremental Capital Output Ratio (ICOR) for the economy is 4. If
the targeted growth in Per Capita Income is 5%, What will be the required external financing
to achieve the target?
lr
ig
(3 points)
Pr
es
s.
Al
49. The following information is taken from Union Budget for the year 2002-03:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Tax Revenue (Net)

Non-tax revenue
Recoveries of loans
Borrowings & Other liabilities
Non-plan revenue expenditure
(Of which, interest payments is Rs.1,17,390 crore).
Rs. crore
1,72,965
72,140
17,680
12,000
1,35,524
2,70,169

26,640
70,313
43,187
The fiscal and primary deficit of the country for the year 2002-03
a. Rs.1,35,524 crore and Rs.18,134 crore
b. Rs.1,35,524 crore and Rs.20,226 crore
c. Rs.1,28,342 crore and Rs.18,134 crore
d. Rs.1,28,342 crore and Rs.20,226 crore
e. Rs.1,35,524 crore and Rs.22,144 crore.
(3 points)
402
Part III
the year 2000-2001.
New issues ratio
Net physical capital formation
Secondary issues
The intermediation ratio for the economy is
0.63
b.
0.78
c.
0.84
d.
0.87
e.
0.90.
04
20
04
04
a.
0.74
2,00,445
1,15,605
(2 points)
M
AC
51. The following information is available for an economy.
se
rv
ed
.IS
BN
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1-
31
4-
02
27
-4
ef
.N
o.

3.0
Acceptable rate of inflation
6%
Money multiplier
3
If the real GDP is desired to grow at 4%, the rate at which reserve money should grow is
a. 5.5%
b. 5.0%
c. 6.0%
d. 6.5%
e. 7.0%.
(2 points)
Million units of
currency (MUC)
re
Particulars
20
04
Th
e
Ic
fa
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ve
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i
ty
Pr
es
s.
Al
lr
ig
ht
Factor incomes received by domestic residents from

Business sector
Foreigners
Gross investment
Business savings
Net investment
Subsidies
Budget deficit
Net transfer to household sector
Indirect taxes
The GDP of the economy at market price is
a.
625 MUC
b.
650 MUC
c.
675 MUC
d.
700 MUC
e.
725 MUC.
500
20
200
25
150
10
15
100
5
10
7
319
70
(2 points)
403
Macroeconomics
e.
None of the above.
04
20
04
B
M
AC
ef
.N
29 MUC (surplus)
d.
-4
35 MUC (deficit)
27
32 MUC (surplus)
c.
31
4-
b.
o.
27 MUC (deficit)
02
a.
Business savings
Subsidies
Budget deficit
Net transfer to household sector
Indirect taxes
National income
Consumption
Gross investment
Net investment
The current account balance of the economy is
04
Million units of
currency (MUC)
25
10
15
100
10
7
70
560
319
200
150
Particulars
(2 points)
.IS
Rs. in crore
14,000
1,00,422
1,07,000
10,000
30,000
7,000
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Particulars
Indirect taxes
Retained profit
Depreciation
The national income of the economy is
a. Rs.82,000 crore
b. Rs.84,000 crore
c. Rs.86,000 crore
d. Rs.88,000 crore
e. Rs.90,000 crore.
BN
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1-
54. The following information is extracted from the National Income Accounts of an economy
for the year 2000-2001.
Ic
(1 point)
20
04
Th
e
55. The following information relates a hypothetical economy:

Particulars
Consumption
Investment
Money supply
a. 2.0
b. 3.0
c. 3.3
d. 5.0
e. 6.0.
(Rs. in crore)
500
170
140
162
(1 point)
404
Part III
56. The monetary liabilities of the central bank of an economy are 20,000 MUC. The government
money in the economy is 200 MUC. Currency deposit ratio for the economy is estimated to
be 0.2 and reserve ratio imposed by the central bank is 5 percent. If foreign exchange
reserves of the country decline by 200 MUC, what would happen to the money supply?
Decline by 960 MUC.
b.
Increase by 960 MUC.
c.
Decline by 820 MUC.
d.
Increase by 820 MUC.
e.
Decline by 480 MUC.
04
a.
04
(2 points)
500
400.0
400
287.5
250
04
475.0
Disposable Income (Yd)
ef
.N
o.
M
AC
Consumption (C)
20
57. The consumption schedule for a two sector economy is given below:
27
-4
250.0
200
If savings in the economy is 100, the equilibrium income in the economy is
750 MUC
b.
700 MUC
c.
800 MUC
d.
950 MUC
e.
1,050 MUC.
se
rv
ed
.IS
BN
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1-
31
4-
02
a.
(2 points)
b.
200 MUC
c.
500 MUC
d.
260 MUC
e.
140 MUC.
Pr
es
40 MUC
(2 points)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
a.
s.
Al
lr
ig
ht
re
58. In an economy the marginal propensity to consume is 0.75, the tax rate is 20%, and
marginal propensity to import is 10%. The net exports function in the economy is
estimated to be 100 0.2Y. Assuming that the investment is autonomous and increases by
500 MUC during the year, the trade balance deteriorates by
20
04
59. Monetary liabilities of the Central Bank in an economy are 20,000 MUC and government
money is 2000 MUC. The currency-deposit ratio is estimated to be 0.25. If the Central Bank
wants to set the money supply at 50,000 MUC, what should be the reserve ratio that the
Central Bank should impose on banks to achieve the targeted money supply?
a.
0.25.
b.
0.30.
c.
0.50.
d.
0.425.
e.
0.20.
(2 points)
405
Macroeconomics
20
04
Th
e
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fa
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s.
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20
04
04
60. The following balances are taken from the balance sheet of the Central Bank of a country:
Particulars
(MUC)
Net worth
400
Credit to central government
1000
Credit to commercial banks
500
100
Other assets
200
Government deposits
100
200
If the government money in the economy is 100 MUC, the high-powered money in the
economy is
a. 1,400 MUC
b. 1,500 MUC
c. 1,650 MUC
d. 1,600 MUC
e. 1,250 MUC.
(2 points)
61. The IS function and LM function in an economy are estimated to be Y = 5700 + 0.5Y 100i
and Y = 5200 + 800i respectively. The investment function in the economy is 1600 100i. If
the government spending increases by 100, which of the following is true about the interest
rate in the economy?
a. Increases from 6.2 to 6.5.
b. Increases from 6.1 to 6.5.
c. Increases from 6.2 to 6.4.
d. Increases from 6.0 to 6.4.
(2 points)
62. In an economy, the investment function is given by I = 1000 40i. If an increase in
government spending by 250 MUC increases the interest rate in the economy by 5%, what
could be the amount of crowding out in the economy?
a. 100 MUC.
b. 150 MUC.
c. 75 MUC.
d. 200 MUC.
e. 90 MUC.
(1 point)
63. The following information is extracted from the National Income Accounts of an economy.
All figures are in millions units of currency (MUC).
Particulars
MUC
1,942
Exports of goods and services
134
Depreciation
118
594
639
Transfer payments
139
Imports of goods and services
165
Personal taxes
405
Net income earned from abroad
22
2,191
The NDP at market prices is
a. 1,472 MUC
b. 3,275 MUC
c. 2,346 MUC
d. 1,782 MUC
e. 3,393 MUC.
(2 points)
406
Part III
64. The following information is extracted from the National Income Accounts of an economy.
All figures are in millions units of currency (MUC).
Particulars
MUC
Depreciation
236
1,188
Corporate taxes
288
Transfer payments
278
Personal taxes
810
44
04
600
Retained earnings
20
Net income earned from abroad
04
1,278
04
M
AC
If the national income is 10,000 MUC, the personal disposable income in the economy would be
8,960 MUC
b.
8,580 MUC
c.
10,240 MUC
d.
9,230 MUC
e.
7,440 MUC.
4-
02
27
-4
ef
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o.
a.
1-
31
(2 points)
BN
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65. The following information is available from the consolidated balance sheet of the banking
sector:
ed
.IS
Particulars
se
rv
Net Bank Credit to the Government
2000
3000
re
Bank Credit to the Commercial Sector
(Rs. Billion)
2200
lr
ig
ht
Net Foreign Exchange Assets of the

Banking Sector
ve
rs
i
ty
Pr
es
s.
Al
Net Non-Monetary Liabilities of the

1200
Banking Sector
If the money supply in the economy is 6200 MUC, the government currency liabilities to the
public is
Rs.200 billion
b.
Rs.6,000 billion
c.
Rs.6,200 billion
Ic
fa
iU
ni
a.
Rs.7,400 billion
e.
None of the above.
20
04
Th
e
d.
(1 point)
66. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC,
a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
(1 point)
407
Macroeconomics
20
04
Th
e
Ic
fa
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ve
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Pr
es
s.
Al
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04
04
67. Acceleration coefficient in an economy is 2. Investment in a period is equal to 75% of the

difference between the desired capital stock and the existing capital stock. If income in
period t is expected to increase by 200 MUC, investment during the period t will be
a. 200 MUC
b. 300 MUC
c. 400 MUC
d. 500 MUC
e. 600 MUC.
(1 point)
68. In an economy demand for money is
Md = 500 + 0.2Y 20i
If money supply in the economy is 2340 MUC and equilibrium rate of interest is 8 percent,
national income is
a. 340 MUC
b. 500 MUC
c. 1,000 MUC
d. 2,000 MUC
e. 10,000 MUC.
(1 point)
69. The current level of income is 500 MUC. Full employment income level is 600 MUC. If the
marginal propensity to consume is 0.75 and there is a proportional income tax of 20%, to
bring about full employment, the government spending
a. Should be increased by 40 MUC
b. Should be decreased by 40 MUC
c. Should be increased by 100 MUC
d. Should be decreased by 100 MUC
(1 point)
70. For an economy, goods market equilibrium is
0.5 Y = 1250 75i.
a. Decrease by 75 MUC
b. Increase by 75 MUC
c. Decrease by 150 MUC
d. Increase by 150 MUC
(1 point)
71. In an economy, there are three industries X, Y and Z. X sells goods worth of Rs.900 to Y and
goods worth Rs.700 to Z. Consumers divide their expenditures equally between Ys goods
and Zs goods. If the national product is Rs.2000, and if there are no other transactions than
mentioned above, the value added by industries Y and Z respectively are
a. Rs.200, Rs.700
b. Rs.100, Rs.300
c. Rs.900, Rs.700
d. Rs.1,000, Rs.1,000
e. Rs.1,600, Rs.2,000.
(1 point)
408
Model Question Paper IV

Suggested Answers
20
04
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04
1. (b) An exogenous variable is one whose value is determined by forces outside the economic
model. Hence, change in the exogenous variable is classified as an autonomous change.
2. (c) In a two sector model, equilibrium occurs when planned saving equals planned
investment.
3. (b) Real GDP = Nominal GDP/GDP deflator.
Hence, GDP deflator = Nominal GDP/Real GDP.
4. (e) If the level of aggregate demand were greater than the level of aggregate supply in the
economy, soon the inventory stock will be depleted, firms will recruit more labor to meet the
increased demand, demand-pull inflation occurs, and labor will demand more wages.
5. (d) Velocity of money is the speed at which a given sum of money circulates in the
economy, i.e. the average number of times a unit of money changes hands in a specified time
period. GDP = MV, where M = money supply and V = velocity of money. Hence, velocity of
money, V = GDP/Money supply.
6. (c) Supply of reserve is not a function of money.
7. (d) Economic development is defined as a process of economic transition involving the
structural and a raising of GNP and per capita income. From the fact the rate of profit has
been gradually but steadily declining we cannot identify the trend of economic development.
8. (d) There will be more variation in durable goods production than in non-durable goods
production during ups and downs in the business cycles.
9. (a) Investment spending is addition to the firms capital such as machines or buildings
typically firms borrow to purchase investment goods. Higher the interest rate, lesser will be
willingness to borrow or invest. Firms want to borrow and invest more when interest rates are
lower. This shows an inverse relationship between investment and interest rate.
10. (e) Policies directed to stimulating exports can influence all the given factors in an economy.
11. (e) Net investment = Gross investment Capital depreciation.
12. (e) All the given factors affect the consumption behavior of individuals.
13. (a) Once deposits are made in a bank, the bank become liable to pay back our amount as per
specifications. Hence, deposits form a liability of a commercial bank.
14. (b) If the RBI purchases bonds from the public, the money flows from the RBI to the public,
which leads to an increase in money supply.
15. (c) When consumption spending lags the receipt of disposable income by one period, it is
given by Ct = f(Yd, t1).
16. (b) Fiscal deficit is the largest deficit for the government.
17. (a) Relative income hypothesis states that people can easily and quickly adjust to higher
living standards, but adjust slowly for lower standards of living.
18. (d) The total expenditure in cigarettes increased irrespective of the like in excise tax because
income elasticity of demand for cigarettes is very high.
19. (c) Increase in autonomous expenditure results in an outward (rightward) shift of the IS
curve. As transfer payments is a part of government autonomous expenditure, increase in
transfer payments results in increase of government autonomous expenditure, which make
the IS curve to shift rightwards.
20. (e) GDP is not a very good measure of economic prosperity because, it does not include
non-monetized transactions/activities. For example, the national product fails to account
household production because such production does not include a market transaction. As a
result the household services of millions of people are excluded from the national income
accounts. Further, GDP does not include environmental degradation such as pollution, etc.
Macroeconomics
21. (e) The impact of a recession is likely to have a stronger impact on the economy when MPC is
smaller or MPS is larger. Note that MPC = 1 MPS. Hence, if MPC is small, it indicates larger
MPS.
22. (a) In an inflationary period, the RBI would undertake measures to reduce money supply in the
economy to reduce inflation. Selling of government securities in the open market reduces the
money supply, thereby helps to contain inflation.
23. (b) GNP = GDP + Net factor income from abroad (NIFA); this implies that when GDP
exceeds GNP, net factor income from abroad will be negative.
20
04
04
24. (b) The foreign exchange reserves of a country apart from serving to balance the BoP
statement of an economy have a strong impact on the monetary policy pursued by the central
bank in the domestic sector. When foreign exchange reserves rises (declines), the money
supply increases (decreases).
re
se
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ed
.IS
BN
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4-
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27
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04
25. (e) Buying and selling stocks are not included in GDP, as it involves only swapping paper
assets and the amount spent on these assets does not directly involve current production.
26. (c) Current account captures the transactions related to trade in goods and services, transfer
payments and factor incomes. If foreign exchange outflow on account of these is more than
inflows, the current account is in deficit.
27. (d) A single shock in autonomous demand produces a slow or distributed lag effect on
output. Dynamic multiplier shows how a given change in autonomous investment affects
the level of output overtime. Dynamic multipliers occur only when there is a lagged
response between consumption and disposable income.
28. (c) Money Multiplier = (1 + Cu)/(Cu + r)
Money Supply = [(1 + Cu)/(Cu + r)] x High powered money.
Hence, if RBI increases the reserve ratio, money supply decreases. However, there will not
be any change in high-powered money, H. Note that changes in reserve ratio (r) and currency
deposit (Cu) affect only money multiplier but not high-powered money (H).
29. (e) Stagflation is a period characterized by high inflation and high unemployment levels.
30. (d) In computing GDP transfer payments, leisure time and non-marketable services are not
taken into account. Therefore, the answer is (d).
ig
ht
31. (a) When MPC = 0
lr
1
= 1. Therefore, the equilibrium income would also decrease by the same
1 0
amount as decrease in investment.
Pr
es
s.
Al
Multiplier =
fa
iU
ni
ve
rs
i
ty
32. (a) Reduce the equilibrium level of income because decrease in government expenditure
would reduce the AD by Rs.10 billion. Whereas decrease in tax receipts increase the AD by
MPC 10 billion. This results in net decrease in AD thereby reducing equilibrium level of
income.
Th
e
Ic
33. (b) Transfer payments are money payments which are not associated with any current
production activity on the part of income receives.
20
04
34. (c) Alternatives ii and iv does not involve marketable transaction hence ignored in
calculation of national income.
35. (a) The transmission mechanism in the Keynesian theory is
Change in Money supply Change in r Change in C & I Change in AD.
36. (c) The relation between market price (MP) and factor cost (FC) is
MP = FC + Indirect taxes Subsidies.
37. (d) All the three approaches are used to compute national income in India.
38. (d) Per capita real GNP is the best indicator of the standard of living.
410
Part III
39. (d) Keeping the supply of loanable funds at the same level increase in government
borrowings increase the demand for loanable funds and put upward pressure on the rate of
interest.
40. (e) APS + APC = 1
If APS < 0 , APC > 1.
Part B: Problems
41. (c) High powered money = Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI = Financial Assets + Other Assets Non-monetary liabilities
Credit to Government + Credit to Banks + Credit to commercial sector
+ Net Foreign exchange assets
24,000 MUC
100 MUC.
04
7,000 + 4,000 + 2,000 + 11,000
M
AC
Other Assets
20
04
04
Financial Assets =
o.
Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net worth
ef
.N
= 500 + 25 + 1,000 = 1,525 MUC
-4
Monetary liabilities = 24,000 + 100 1,525
High powered money (H)
= 22,575 + 25
31
= 25 MUC
:8
= 22,600 MUC
1-
Government money
4-
02
27
= 22,575 MUC.
= Hm
Money multiplier (m)
= [(1 + 0.24)/(0.24 + 0.07)] = 4
ed
.IS
BN
Money Supply
se
rv
Money Supply in the economy = 22,600 4 = 90,400 MUC.
re
42. (d) If net worth is eroded by 50%, Net worth = 500 MUC.
ig
ht
Monetary liabilities = 22,600 + 500 = 23,100
s.
Al
lr
H = 23,100.
23,100 [(1 + 0.24)/(0.24 + r)]
0.0769
7.69%
ni
ve
rs
i
ty
90,400
Pr
es
If money supply is held constant,
fa
iU
The central bank should increase the reserve ratio to 7.69%.
Th
e
Ic
43. (c) Ct = 80 + 0.6 Ytd + 0.2 Ct 1
20
04
At steady state, Ct = Ct 1
Ct
80 + 0.6 Ytd + 0.2Ct
0.8 Ct
80 + 0.6 Ytd
Ct
100 + 0.75 Ytd
Ct
0.75 Ytd
0.75 100
75
If
Ytd
increase by 100, steady state level of consumption increase by 75.
411
Macroeconomics
380 + 0.35 Yd + 10i
380 + 0.65Yd 10i
Yd
(Y tY + R)
(Y 0.3Y + 200)
44. (c) S
380+ 0.65 (Y 0.3Y + 200) 10i
510 + 0.455Y 10i.
IS function
-4
27
02
650 + 100i
= 2,600 + 400i
0.25
LM function.
31
Y=
0.25Y + 350 100i
4-
1,000 =
ef
.N
o.
M
AC
04
20
04
=
C + I + G + (E M)
=
510 + 0.455Y 10i + 300 + 0.15Y 50i + 1200 + 900 50 0.105Y
Y =
2,860 + 0.5Y 60i
Y =
5,720 120i
IS function.
LM function
Ms =
Md
Md =
Mt + Ma
=
0.25Y + 350 100i
04
20
04
Th
e
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Pr
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s.
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At equilibrium LM = IS
2,600 + 400i =
5,720 120i
520i
=
3,120
i
=
6%
Y
=
5,000 MUC.
45. (e) 0.5Y = 2,860 60 i
Or, Y = 5,720 120i
0.25Y = 650 + 100i
Or, Y = 2,600 + 400i
At equilibrium LM = IS
2,600 + 400i =
5,720 120i
520i
=
3,120
i
=
6%
Y
=
5,000.
If Y is to increase by 10% new equilibrium income is 5,000 (1 + 0.10) = 5,500
Y =
2,600 + 400i
LM function
If Y =
5,500
400i =
5,500 2,600
i
=
7.25%
IS function with G as a variable is
412
0.5Y =
(2,860 1,200 + G) 60i
(1,660 + G 60i)
0.5
3,320 + 2G (120 7.25)
2G =
3,050
1,525.
Part III
Increase in G = 1,525 1,200 = 325 MUC.

46. (a) If Y = 5,000, then A = 5,000 + 120i
We know that, 0.25Y
= 650 + 100i
Thus, i
= [0.25(5000) 650]/100 = 6
Thus, A
= 5,000 + 120(6) = 5,720.
Thus, Y
= 5,720 120i
IS function
If Y is to increase by 10% new equilibrium income is 5,000 (1 + 0.10) = 5,500.
04
If Y = 5,500,
= Md
20
Ms
04
= 1.83%
Md = 0.25Y + 350 100i
M
AC
04
120i = 5,720 5,500
LM function
ef
.N
o.
If Y = 5,500 and i = 1.83%
= (0.25 5,500) + 350 (100 1.83)
Ms
27
-4
= 1,542 MUC.
4-
02
47. (a) Revenue surplus (deficit) = Revenue receipts Revenue expenditure
31
= 1,72,965 + 72,140 2,70,169 70,313 = Rs. (95,377) crore
[(1 + gp) (1 + gn) 1]
se
rv
Where,
= Growth rate is GDP
gp
= Growth rate is per capita income (GDP)
gn
= Growth rate is population
gy
= [(1.05) (1.015) 1]
s.
Al
lr
ig
ht
re
gy
Pr
es
.IS
ed
48. (b) gy
BN
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1-
Capital surplus (deficit) = Capital receipts Capital expenditure = [17,680 + 12,000 +

1,35,524] [26,640 + 43,187] = Rs.95,377 crore.
ty
= 0.06575
Investment Income ratio

ICOR
ni
fa
iU
gy
ve
rs
i
= 6.575%.
20
04
Th
e
Ic
To achieve the target gy, Investment Income ratio for the economy is (gy x ICOR)
= 6.575 4 = 26.3%
External financing required

=
Required investment Domestic savings
26.3 25.00
1.3% of GDP.
49. (a) Fiscal deficit = Borrowing and liabilities

= Rs.1,35,524 crore
Primary deficit = Fiscal deficit Interest payments = 1,35,524 1,17,390
= Rs.18,134 crore.
413
Macroeconomics
50. (b) NIR

=
Primary issues by non financial sector

Total physical assets formation
Thus,
x
2,00,445
= 0.74 x 2,00,445 = 1,48,329.3 units
04
0.74 =
04
o.
M
AC
1,15,605
= 0.779 or 0.78.
1,48,329.3
B
W
Volume of dinancial instruments issued by financial intermediaries

Volume of primary issues by non financial sectors
IR =
20
04
Hence, primary issues by non financial sector is 1,48,329.3 units
R
-4
31
4-
02
27
= 3.0;
= 4%; and
= 6%
= a.gy + gp
= (3 x 4) + 6
= 18%
BN
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1-

(a)
Expected rate of growth in real GDP (gy)
Acceptable rate of inflation (gp)
Rate of growth of money stock (gm)
ef
.N
51. (c) Given,
.IS
Given, money multiplier is 3,

rate of growth of reserve money
(Gross investment Net investment)
200 150 = 50 MUC
s.
Al
lr
Pr
es
Depreciation
ig
ht
re
se
rv
ed
= 18/3
= 6%.
52. (c) GDPMP = Factor income paid to domestic residents by the production sector + Factor
income paid to foreign residents by the production sector + Business savings + Corporate profit
tax + Depreciation + Indirect taxes Subsidies.
ty
Factor income paid abroad = Factor income received from abroad NFIA
ve
rs
i
20 ( 5) = 25
ni
GDPMP = 500 + 25 + 25 + 15 + 50 + 70 10 = 675 MUC.
fa
iU
53. (a) CAB = Domestic savings (DS) Domestic investment (DI)
Th
e
Ic
DS = Business savings + Government savings + Household savings
20
04
Household savings = Personal disposable income Personal consumption

PDI = NI Business savings Corporate profit tax + Net transfers Personal income tax
PDI
560 25 15 + 7 100 = 427 MUC
PS
427 319 = 108 MUC
CAB
(25 10 + 108) 150 = 27 MUC
Current account deficit = 27 MUC.

54. (c) National income = NNPFC = GNPMP Indirect taxes Depreciation
= 1,07,000 14,000 7,000 = Rs.86,000 crore.
55. (d) Velocity of money = Y/Ms = 810/162 = 5
Y = C + I + G = 500 + 170 + 140 = 810
Ms = 162.
414
Part III
M
AC
04
20
04
04
56. (a) Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money =
monetary liabilities of the central bank + government money.
Ms = H. m
When foreign exchange reserves of the country decline by Rs.200 MUC, the monetary
liabilities also fall by 200 MUC. Thus, money supply decline by 4.8 x 200 = 960 MUC.
57. (c) C = + Yd
Where, = autonomous consumption and = marginal propensity to consume (MPC)
= C/Yd = (475 400)/100 = 0.75
If MPC = 0.75, autonomous consumption:
475 = a + 0.75(500) Or, a = 100.
Thus, C = 100 + 0.75Yd Or, S = 100 + 0.25Yd
When S = 100, 100 = 100 + 0.25Yd
Or, 200 = 0.25Yd Or, Yd = 800 MUC
Since the economy is a two sector economy, Y = Yd (disposable income).
ef
.N
o.
58. (b) Multiplier = 1/(1 MPC + MPC t + MPI) = 1/(1 0.75 + 0.75 0.2+0.1) = 1/(0.4+0.1)
= 2.0
-4
Thus if investment increases by 500, income increases by 1000. Thus, change in trade
balance
27
= 0.2 x 1000 = (200) MUC.
31
4-
02
59. (b) High-powered money (H) = Government money + Monetary liabilities of the Central
Bank = 20,000 + 2000 = 22,000 MUC.
:8
.IS
BN
Or, 22,000 x {(1.25/0.25 + r)} = 50,000

0.55 = 0.25 + r Or, r = 0.3.
1-
Money supply, Ms = H x {(1 + Cu)/(Cu + r)}
se
rv
ed
60. (a) High-powered money (H) = Monetary liabilities of Central Bank + Government money =
1300 + 100 = 1400.
re
Total assets = Total liabilities
s.
Al
lr
ig
ht
(Credit to Central Government + Credit to commercial banks + Foreign exchange assets +

Other assets) = (Net worth + Government deposits + Other non-monetary liabilities +
Monetary liabilities)
Pr
es
(1000 + 500 + 200 + 200) = (400 + 100 + 100 + ML) 1900 = 600 + ML
ve
rs
i
ty
Or, ML = 1300 MUC.
20
04
Th
e
Ic
fa
iU
ni
61. (c) At equilibrium, IS = LM

Y = 5700 + 0.5Y 100i
0.5Y = 5700 100i
Y = 11400 200i
.IS function
Y = 5200 + 800i
.LM function
Thus at simultaneous equilibrium,
11400 200i = 5200 + 800i
Or, 6200 = 1000i Or, i = 6.2
When government spending increases by 100, the IS function becomes
0.5Y = (5700 + 100) 100i
0.5Y = 5800 100i Or, Y = 11600 200i
Thus, at equilibrium,
5200 + 800i = 11600 200i
Or, 1000i = 6400 Or, i = 6.4.
415
Macroeconomics
62. (d) Crowding-out refers to decrease in private investment because of increase in interest rate
caused by the increase government spending. Crowding out = 40 x 5 = 200 MUC.
63. (b) GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 165) = 3,393
Thus, NDP at market price = GDP at market price depreciation = 3,393 118 = 3,275
MUC.
64. (b) Personal income = National income (corporate taxes + retained earnings) + Transfer
payments = 10,000 (288 + 600) + 278 = 9,390.
Personal disposable income = personal income personal taxes = 9,390 810 = 8,580 MUC.
20
04
04
65. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector Net non-monetary liabilities of the
banking sector + Government money
04
Rs.6,200 billion = 2,000 + 3,000 + 2,200 1,200+ Government money
Government money = 6,200 6,000 = Rs.200 billion.
M
AC
66. (d) Domestic savings = Private savings + Public savings
o.
Private savings = 1,500 (500) = 2,000 MUC.
ef
.N
The answer is (d).
67. (b) Investment in period t = 0.75 Desired investment in period t
27
-4
Desired investment in period t = Acceleration coefficient Change in income
4-
02
= 2 200 = 400
1:8
The answer is (b).

At equilibrium Ms = Md.
ed
.IS
BN
68. (e) Md = 500 + 0.2Y 20i

500 + 0.2Y (20 8)
0.2Y
2,340 500 + 160 = 2,000
re
10,000 MUC. Therefore the answer is (e).
ht
ig
se
rv
2,340 =
=
s.
Al
lr
69. (a) Multiplier (m)
Y = 100
iU
ni
Y 100
= 40 MUC.
=
m
2.5
fa
G =
ty
Pr
es
1
1
1
=
=
= 2.5
1 MPC(1 t)
1 0.75(1 0.20)
0.40
ve
rs
i
31
Investment in period t = 0.75400 = 300 MUC
Th
e
Ic
70. (d) 0.5Y = 1250 75i
20
04
Y = 2500 150i
71. (b) Value added by the industry Y = 2,000/2 900 = 1,000 900 = Rs.100
Value added by the industry Z = 2,000/2 700 = 1,000 700 = Rs.300.
416
Model Question Paper V

Time: 3 Hours
On the basis of the Keynesian model of output determination, the multiplier effect means that
An increase in investment will increase consumption more than itself
b.
An increase in investment will increase output by more than itself
c.
An increase in investment will increase output by as much as itself
d.
An increase in investment will increase saving by more than itself
e.
An increase in investment will increase consumption by less than itself.
In the equation C = C + cY, C is
04
A parameter whose value depends upon the level of disposable income
c.
A behavioral coefficient
d.
A dependent variable
e.
None of the above.
B
W
ef
.N
R
-4
27
02
41-
The circular flow of income for a private sector model shows

The flow of income between the household and business sectors
b.
The flow of income between the government and business sectors
c.
The flow of income between the household, business and government sectors
d.
The flow of income to the household and government sectors
e.
None of the above.
re
se
rv
ed
.IS
BN
:8
a.
Primary factors of production are
ig
ht
4.
Labor, land and capital
s.
Al
lr
a.
Labor and capital
c.
Land and capital
d.
Labor and land
e.
Irreplaceable inputs.
ni
ve
rs
i
ty
Pr
es
b.
The result of subtracting a depreciation allowance from GDP is
20
04
Disposable income
Ic
Th
e
a.
fa
iU
5.
20
b.
3.
6.
04
A parameter helping to determine the level of consumption
o.
a.
31
2.
04
a.
M
AC
1.
b.
Personal income
c.
Net domestic product
d.
Yearly capital expenditure
e.
Adjusted gross domestic product.
If people do not consume all their incomes and if they put the unspent amount into a bank,
they are, in national income and product terms
a.
Saving but not investing
b.
Investing but not saving
c.
Both saving and investing
d.
Neither saving nor investing
e.
Saving, but investing only to the extent that they buy securities.
Macroeconomics
7.
When we speak of expressing the prices of goods in an economy, we are speaking primarily
of moneys role as
A store of value or wealth
b.
A precautionary hedge
c.
A medium of exchange
d.
A unit of account
e.
A standard of deferred payments.
Suppose that the supply of money were fixed. An increase in the demand for money should
be expected to cause
The equilibrium rate of interest to increase
b.
The equilibrium quantity of money demanded to increase
c.
Either answer (a) or (b), depending upon the circumstance
d.
Both answers (a) and (b), without reservations
e.
None of the above.
Trade policy.
M
AC
o.
ef
.N
-4
e.
27
Budget deficit
02
d.
4-
Monetary policy
31
c.
1-
Fiscal policy
:8
b.
BN
Supply shocks
Stagflation is usually caused by

a.
04
20
a.
.IS
9.
04
04
8.
a.
se
rv
ed
10. An expansion phase of the usual business cycle can be most appropriately represented as
An outward shift in the aggregate demand curve
b.
A downward shift in the aggregate demand curve
c.
An upward shift in the aggregate supply curve
d.
A downward shift in the aggregate supply curve
e.
A rotation of the aggregate supply curve to a more vertical position.
Pr
es
s.
Al
lr
ig
ht
re
a.
ve
rs
i
ty
11. A Keynesian economist thinks that

Government spending always crowds-out private investment and spending
b.
Higher government spending can be accomplished without crowding-out in the short

run
Ic
fa
iU
ni
a.
Unemployment is a disequilibrium situation that cannot persist very long
d.
Stabilization policy is usually futile
e.
Government spending cannot crowd-out private investment and spending.
20
04
Th
e
c.
12. If you want to compute disposable personal income from NDP, then one thing you must not
do is
418
a.
Deduct depreciation
b.
Add government transfer payments
c.
Deduct indirect business taxes
d.
Deduct social security levies
e.
Deduct undistributed corporation profits.
Part III
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
13. In deciding whether to hold money on other interest-bearing assets, people will compare
a. The inflation rate and the nominal interest rate on the other investment
b. The nominal interest rate on money and the nominal interest rate on the other investment
c. The value of the other asset and the stream of future profits from it
d. The purchasing power of the money and the loss incurred due to foregone consumption
e. Only the inflation rate.
14. Most models of economic growth conclude that
a. Technological change will impoverish at least one factor of production
b. Technological change can benefit at most one factor of production
c. Technological advance increases labors share of output
d. Technological advance can increase the real returns to all factors of production
e. Technological change is usually the enemy of labor because pieces of capital can
replace labor in the workplace.
15. In stating that C = f(Yd, W)
a. It is hypothesized that Yd is a more important determinant of C than W
b. It is hypothesized that W is a more important determinant of C than Yd
c. W and Yd are dependent variables explaining C
d. Yd and W are independent variables explaining C
16. When the LM curve is very steep, an increase in autonomous government expenditure
a. Will have little impact on rate of interest and will result in an increase in income
b. Will have little impact on income and mainly interest rate will increase
c. Will significantly reduce interest rate and increase level of income
d. Will have little effect on interest rate and income
e. Will have high impact on rate of interest and will result in a decrease in income.
17. Narrow money includes currency with public, demand portion of savings deposits and
a. Demand and time deposits with banks and other deposits with RBI
b. Demand and time deposits with banks
c. Demand deposits with banks and other deposits with RBI
d. Demand deposits with banks and other deposits with RBI and post office savings deposits
e. Demand deposits with banks and other deposits with RBI, and post office savings
deposits and time deposits.
18. A decrease in currency-deposit ratio on the part of the public will cause
a. An increase in high-powered money and money supply
b. An increase in bank reserves and decrease in money supply
c. An increase in money supply but will not change the high-powered money
d. A decrease in money supply while the high-powered money will not change
e. A decrease in money supply while the high-powered money will increase.
19. Which of the following is a transfer payment?
a. The payment received by a Central Government employee from the Central Government
on his being transferred from Delhi to Chennai, to meet the traveling expenses.
b. A pension cheque received by former railway employee.
c. Payment received from the neighbors for caring for their garden while they were on
vacation.
d. The payment received by teacher.
e. The payment received by nurse for taking care of a child.
419
Macroeconomics
20. In a simple model of a closed economy the government expenditure is assumed to the
exogenous. While calculating the income multiplier, marginal propensity to consume is
considered and marginal propensity to invest is not considered. This is because
Only consumption of consumer goods is related to income level
b.
Investment is assumed to be exogenous
c.
Macroeconomic models are usually based on simplistic assumptions
d.
Investment is assumed to be consistent
e.
None of the above.
04
a.
b.
A non-monetary liabilities of the RBI
c.
Part of money supply but not high-powered money
d.
Part of both high-powered money and money supply
e.
None of the above.
20
Part of high-powered money but not of money supply
ef
.N
o.
M
AC
04
a.
04
21. Government deposits with the RBI are
27
-4
22. Suppose the net export function is NX = X mY and the net export balance is zero. An
increase in autonomous investment spending will
Increase the net export balance and the income level
b.
Increase the income level but make the net export balance negative
c.
Increase the income level and have no effect upon the net export balance
d.
Have no effect upon the income level but cause the net export balance to become negative
e.
None of the above.
ed
.IS
BN
:8
1-
31
4-
02
a.
se
rv
23. Which of the following is false?
Speculative demand for money varies directly with the interest rate.
b.
If the frequency at which a person receives income is increased, transactionary demand

for money increases.
c.
Transactionary demand for money varies positively with income and such variation is
usually more than proportionate.
d.
e.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
a.
20
04
A decrease in the equilibrium level of income by the same amount
Ic
Th
e
a.
fa
iU
24. If the marginal propensity to consume is zero, a decrease in investment would lead to
b.
No change in the equilibrium level of income
c.
An unending downward spiral in the equilibrium level of income
d.
An unending upward spiral in the equilibrium level of income
e.
An increase in the equilibrium level of income by the same amount.
25. Which of the following components of Investment can be negative?
420
a.
Plant and machinery.
b.
Residential construction.
c.
Inventory.
d.
Non-residential construction.
e.
None of the above.
Part III
26. Simultaneous equilibrium in the money (LM) and goods (IS) markets exist
a.
At an unlimited number of income levels and rates of interest
b.
At only one income level and rate of interest
c.
At an unlimited number of income levels and only one rate of interest
d.
At only one income level and an unlimited number of rates of interest
e.
None of the above.
27. Which of the following reduces the likelihood that fiscal policy in the real world will help to
promote economic stability?
Policy planners cannot estimate the impact on income and output that may result from a
fiscal action.
b.
The time lag between the recognition that a policy change is needed and the actual
impact of the policy change makes it difficult to time fiscal policy properly.
c.
Policy planners are reluctant to implement expansionary fiscal policy even during a
serious recession.
d.
Empirical studies have observed that policy planners will be more concerned with
inflation than unemployment. Thus, fiscal policy will generally be restrictive except at
the time of deflation.
e.
None of the above.
27
-4
ef
.N
o.
M
AC
04
20
04
04
a.
31
4-
02
28. If an economy is currently experiencing both full employment and price stability, a major tax
reduction will probably cause
An increase in unemployment in near future
b.
An acceleration in the inflation rate, unless government expenditures are also, reduced
c.
An increase in the interest rate, since individuals will reduce their savings in response to
the tax cut
d.
A decrease in consumption, unless the expected budget deficit is financed by selling

bonds to foreigners
e.
An acceleration in the inflation rate, unless government expenditures are also increased.
ht
re
se
rv
ed
.IS
BN
:8
1-
a.
lr
ig
29. Commercial banks deposits with the RBI are

Part of high-powered money but not of money supply
b.
A non-monetary liability of the RBI
c.
Part of money supply but not of high-powered money
d.
Part of both high-powered money and money supply
e.
None of the above.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
Th
e
a.
Ic
fa
30. The dividends received by an Indian company from its Malaysian subsidiary would be included in
20
04
b.
GDP of India and GNP of Malaysia

GNP of India and GDP of Malaysia
c.
GNP of both India and Malaysia
d.
GDP of both India and Malaysia
e.
GDP of India.
31. Supply-side economics is also called

a.
Classical economics
b.
Keynesian economics
c.
Post-Keynesian economics
d.
Marshallian economics
e.
New classical economics.
421
Macroeconomics
32. The balanced budget multiplier is not effected by

a.
b.
c.
Investment coefficient
d.
e.
33. Money earned abroad and remitted to home country is

Included in home country GDP
b.
Included in home country GNP
c.
Included in both home country GDP and GNP
d.
Excluded from both home country GDP and GNP
e.
None of the above.
M
AC
04
20
04
04
a.
Aggregate supply varies positively with price level
b.
Aggregate supply is independent of the price level
c.
Involuntary unemployment cannot exist
d.
Nominal and real wages are perfectly flexible
e.
None of the above.
4-
02
27
-4
ef
.N
a.
o.
34. According to the simple Keynesian model
1-
31
35. A change in the money supply has greater effect upon equilibrium income if
The private sector spending is more interest-sensitive
:8
a.
The private sector spending is less interest-sensitive

The expenditure multiplier is smaller than anticipated
d.
The demand for money is more interest-sensitive
e.
re
se
rv
ed
.IS
BN
b.
c.
ig
ht
36. Usually Marginal Propensity to Consume (MPC) is

> Zero
b.
< Zero
c.
>1
d.
<1
e.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
a.
fa
b.
When the net factor income from abroad is positive
c.
When depreciation of fixed capital exceeds gross investment
d.
e.
Th
e
20
04
When the net factor income from abroad is negative
Ic
a.
iU
38. When the addition to capital goods in an economy exceed the capital consumption allowance,
the economy experiences
422
a.
Negative net investment
b.
Equilibrium investment
c.
Positive net investment
d.
Negative gross investment
e.
Zero gross investment.
Part III
39. National Income is

a.
b.
c.
NDP at factor cost
d.
NNP at factor cost
e.
GNP at market price.

Equilibrium income depends solely on the position of LM curve
b.
Equilibrium income depends solely on the position of IS curve
c.
There is no speculative demand for money
d.
Speculative demand for money is infinity
e.
ef
.N
o.
M
AC
04
20
04
04
a.
41. The data relating to the various components of money supply in India are as follows:
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Particulars
Rs. in crore
2,89,636
Rupee coins
3,884
Small coins
1,982
Cash in hand
9,972
1,98,212
11,254
9,67,120
Post office deposits
10,082
51,938
According to M1 and M4 definition, the money stock in the country are
Rs.5,14,940 crore and 15,33,998 crore
b.
c.
d.
ve
rs
i
ni
iU
fa
Ic
None of the above.

(3 points)
Th
e
e.
ty
a.
20
04
42. The following savings and import functions have been estimated for an economy.
S
=
50 + 0.25Y
M =
0.1Y
Where S is aggregate savings, M is imports and Y is GDP. Private investment increases by
200 MUC and government expenditure decreases by 60 MUC. What is the impact on GDP?
a.
GDP decreases by 400 MUC.
b.
GDP increases by 250 MUC.
c.
d.
e.
None of the above.

(2 points)
423
Macroeconomics
43. For an economy the following indicators of financial development are available:
Particulars
Year 2000
Finance Ratio
0.25
Financial Intermediation Ratio
1.25
0.60
Primary Issues
The total issues for the year 2000 is
Rs.1,70,000
b.
Rs.1,55,000
c.
Rs.1,60,000
d.
Rs.2,30,000
e.
Rs.2,00,000.
ef
.N
44. The following relations are derived for an economy.
1,140 + 0.5Yd + 12i
900 + 0.1 Y 100i
Tax function (T)
0.30 Y
600
3,440
re
se
rv
Speculative demand for

money (Ma)
27
02
431
1-
1,050 150i
1,636
ht
:8
.IS
BN
0.25Y
ed
Transaction demand for

money (Mt)
-4
Saving function (S)
Exports (E)
(2 points)
o.
M
AC
04
20
04
04
a.
1,00,000
2,785 MUC.
b.
2,695 MUC.
c.
2,555 MUC.
d.
2,465 MUC.
e.
2,355 MUC.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
s.
Al
lr
ig
Import function (M)

150 + 0.15Y
If the equilibrium output (Y) is 9,580, what is the money supply in the economy?
(3 points)
20
04
45. In a hypothetical economy, the IS function is 0.7Y = 7,266 112i. The money supply in the
economy is 2,695 MUC. The demand function for money in the economy is estimated to be
0.25Y + 1,050 150i. The equilibrium income is 9,580 MUC. The exports of the economy
are at
1,636 MUC. The import function in the economy is 150 + 0.15Y. If the money
supply is expected to increase by 190 MUC, what will be the impact on trade balance?
a.
Decrease by 24 MUC.
b.
Decrease by 36 MUC.
c.
Decrease by 40 MUC.
d.
Decrease by 42 MUC.
e.
Decrease by 44 MUC.
(3 points)
424
Part III
46. The following information is available from balance sheet of the Reserve Bank of India:
Rs. million
Credit to Banking Sector
12,000
18,000
Government Deposits
600
Other deposits with the RBI
100
400
250
o.
Other assets
20
21,000
04
7,000
04
10,000
M
AC
Net worth
04
Particulars
Rs.1,84,600 million.
27
e.
02
Rs.1,80,640 million
4-
d.
31
Rs.1,76,780 million
1-
c.
:8
Rs.1,66,560 million
BN
b.
.IS
Rs.1,56,460 million
se
rv
ed
a.
-4
ef
.N
Government money in the economy is Rs.750m. Currency deposit ratio for the economy is
estimated to be 0.30. Cash Reserve Ratio (CRR) imposed by the RBI is 7.5 percent. The
money supply in the economy is
(3 points)
lr
ig
ht
re
47. The high-powered money (H) in the economy is Rs.48,000m. If foreign exchange reserves of
India decline by Rs.600m, what would happen to the money supply? (Assume multiplier to
be 3.47)
Money supply decreases by Rs.2,702 million.
b.
c.
d.
e.

(2 points)
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
48. The currency deposit ratio and CRR are 30% and 7.5% respectively. The high-powered
money in the economy is 48,000m. The foreign exchange reserves of India are expected to
decline by Rs.600m during the forthcoming period. If the RBI would like to sterilize the
impact of change in foreign exchange reserves on the money supply by adjusting the CRR,
what should be the new CRR?
a.
7%.
b.
7.5%.
c.
8%.
d.
8.5%.
e.
9%.
(3 points)
425
Macroeconomics
49. The following information pertains to the balance of payments of India for the period
April-December 2001.
US $
million
Particulars
42121
Merchandize exports
32639
Export of services, including travel and

transportation
15316
Import of services, including travel and

transportation
13677
ef
.N
Dr. $ 754 million.
e.
-4
Cr. $ 726 million
27
d.
02
Dr. $ 726 million

Cr. $ 752 million
(3 points)
1-
31
b.
c.
o.
Dr. $ 752 million
4-
a.
49
M
AC

The current account balance of India is
20
3931
04
1912
04
04
Merchandize imports
.IS
BN
:8
50. The following information pertains to the balance of payments of India for the period
April-December 2001.
US $ million
ed
Particulars
3931
se
rv
49
re
9185
ig
ht
4055
Net foreign investments by India
555
Pr
es
s.
Al
lr
Net foreign investments in India
130
Net external assistance to India
471
Net short-term borrowings by India
835
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Net Commercial Borrowings

(MT & LT) by India
Other capital inflows
12646
Other capital outflows
10724
Errors & Omissions

2049
If the current account balance of India is 726 (deficit), what would be the change in foreign
exchange reserves during the period?
a.
Foreign exchange reserves increase by US $ 5373 million.
b.
Foreign exchange reserves decrease by US $ 5252 million.
c.
d.
e.
Foreign exchange reserves decrease by US $ 5252 million.

(3 points)
426
Part III
51. The current and capital account balances of India are $726 (Dr) and $6295 (Cr). If money
multiplier is estimated to be 4, what is the impact of balance of payments position on the
money supply in the economy? (Exchange rate is Rs.50/US$)
a.
b.
c.
d.
e.
20
04
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
se
rv
re
40,000 MUC.
e.
ht
37,500 MUC
ig
d.
lr
35,000 MUC
(1 point)
Pr
es
32,500 MUC
c.
ed
30,000 MUC
b.
2,000
30,000
1,500
500
4,200
11,000
Nil
6,500
s.
Al
a.
Million units of currency (MUC)

16,000
21,600
.IS
Particulars
Factor incomes received by domestic
residents
Rent
Wages and salaries
Interest income
Dividends
Indirect taxes
Gross investment
Net factor income from abroad (NFIA)
Corporate profits (profit before tax)
The national income of the economy is
04
04
(2 points)
ni
ve
rs
i
ty
Particulars
20
04
Th
e
Ic
fa
iU
Factor incomes received by domestic

residents
Rent
Wages and salaries
Interest income
Dividends
Direct taxes
Indirect taxes
Gross investment
Corporate profits (Profit before tax)
Net investment
Subsidies

(MUC)
2,000
30,000
1,500
500
5,000
8,000
4,200
11,000
6,500
7,000
700
Nil
427
Macroeconomics
What is the amount of GDP (at market prices) of the economy?

a.
42,500 MUC.
b.
45,000 MUC.
c.
47,500 MUC.
d.
50,000 MUC.
e.
52,500 MUC.
(3 points)
Net investment
7,000
Transfers to household sector (from

government)
1,200
o.
ef
.N
-4
27
36,200 MUC.
02
e.
4-
35,200 MUC
31
d.
1-
34,200 MUC
:8
c.
BN
33,200 MUC
.IS
b.
(1 point)
se
rv
ed
32,200 MUC
40,000
National income
The personal income in the economy is
a.
6,500
M
AC
Corporate Profits (Profit before tax)
04
500
Dividends
04
20
Particulars
04
ht
Particulars
re
s.
Al
lr
ig
Pr
es
Dividends
8,000
ve
rs
i
ty
ni
iU
4,200
6,500
700
Nil
fa
Subsidies
Ic
Th
e
500
5,000
Corporate Profits (Profit before tax)
20
04
16,000

Indirect taxes
Transfers to household sector (from

government)
Personal saving
The net domestic savings in the economy are
a.
5,900 MUC
b.
5,750 MUC
c.
6,100 MUC
d.
7,200 MUC
e.
None of the above.
1,200
5,600
(3 points)
428
Part III
56. The consumption function for an economy is ascertained as

Ct = 250 + 0.60 Ytd + 0.20 Ct1
Where Ct and Ct1 denote consumption in period t and t1 respectively and Ytd is the
687.50 MUC
c.
652.25 MUC
d.
702.15 MUC
e.
712.20 MUC.
04
b.
20
655.75 MUC
04
a.
04
disposable income in period t. If Ytd has been 500 MUC for a long time, compute the steady
state level of consumption in the economy
(3 points)
ef
.N
o.
M
AC
57. Investment during the next year is expected to be 2,000 MUC, which is likely to increase the
GDP to 3,000 MUC. If GDP for the current year is 2500 MUC, accelerator coefficient for the
economy is
1.25
b.
1.50
c.
4.00
d.
5.00
e.
None of the above.
1-
31
4-
02
27
-4
a.
BN
:8
(1 point)
ed
.IS
58. The following information is available from the consolidated balance sheet of the banking
sector:
Rs. Billion
2,000
3,000
Rs.200 billion
b.
Rs.6,000 billion
iU
fa
Ic
Th
e
Rs.6,200 billion
d.
Rs.7,400 billion
e.
None of the above.

(1 point)
20
04
1,200
6,200
ni
a.
c.
2,200
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
Item
Net Bank Credit to the Government
Bank Credit to the Commercial Sector
Net Foreign Exchange Assets of the
Banking Sector
Net Non-Monetary Liabilities of the
Banking Sector
Money supply in the economy
Government Currency Liabilities to the Public is
59. If the economy is expected to grow at 8 percent and expected growth rate in per capita
income is 6 percent, the population is expected to increase by
a.
2%
b.
4%
c.
6%
d.
10%
e.
16%.
(1 point)
429
Macroeconomics
60. The following information relates to an economy:
Rs.98 crore
Rs.105 crore
d.
Rs.162 crore
e.
Rs.195 crore.
M
AC
c.
04
b.
20
Rs.65 crore
04
a.
04
Particulars
Rs. in crore
Consumption
500
Investment
170
140
Velocity of money
5
The Money supply in the economy is
(1 point)
ef
.N
o.
61. National savings for a year is 1,500 MUC. If the government budget deficit was 500 MUC,
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
:8
1-
31
4-
02
27
-4
a.
(1 point)
0 MUC
d.
50 MUC
e.
100 MUC.
se
rv
50 MUC
c.
lr
ig
ht
re
b.
ed
100 MUC
Pr
es
s.
Al
a.
.IS
BN
62. In an economy Marginal Propensity to Consume is 0.75 and proportional tax rate is 0.20. If
government expenditure increases by 100, change in budget surplus will be
(1 point)
ni
ve
rs
i
ty
requirement is
Rs.250
b.
Rs.2,250
20
04
fa
Ic
Th
e
c.
iU
a.
Rs.2,500
d.
Rs.5,000
e.
None of the above.
(1 point)
64. Savings function of an economy is S = 150 + 0.25 Yd. Break-even disposable income for
the economy is
a.
37.5 MUC
b.
150 MUC
c.
450 MUC
d.
600 MUC
e.
750 MUC.
(1 point)
430
Part III
65. An individual receives Rs.7,000 every two weeks. If the individual spends the income evenly
throughout the two weeks, his average holding of money is
a.
Rs.500
b.
Rs.1,000
c.
Rs.1,750
d.
Rs.3,500
e.
Rs.7,000.
(1 point)
Interest Income
15
04
04
-4
40 BUC.
27
e.
02
30 BUC
4-
d.
31
25 BUC
1-
c.
:8
15 BUC
BN
b.
.IS
5 BUC
(1 point)
se
rv
ed
a.
10
Rental Income
Profit in the economy is
M
AC
60
o.
Wages & Salaries
100
ef
.N
National Income
20
Billion units of
currency (BUC)
Item
04
66. The following information pertains to National Income Accounts of an economy:
re
67. For an economy, goods market equilibrium is
ht
0.5 Y = 1250 75i.
s.
Al
lr
ig
Decrease by 75 MUC
b.
Increase by 75 MUC
c.
Decrease by 150 MUC
d.
Increase by 150 MUC
e.
Insufficient data.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
(1 point)
20
04
68. In an economy, Marginal Propensity to Consume (MPC) is estimated to be 0.60. The

economy is currently at equilibrium. Assuming that Aggregate Supply (AS) in the economy
lags Aggregate Demand (AD) in the economy by one period, if autonomous investment
increases by 10 in period t, income for the economy for the period t+1
a.
Increases by 4
b.
Increases by 6
c.
Increases by 10
d.
Increases by 25
e.
None of the above.

(1 point)
431
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
69. For an economy, Average Propensity to Save is -0.05. Average Propensity to Consume for
the economy is
a. 0.05
b. 0.95
c. 1.00
d. 1.05
(1 point)
70. In an economy Marginal Propensity to Save (MPS) is estimated to be 0.25 and the
proportional tax rate is 0.20. Multiplier for the economy is
a. 2.0
b. 2.5
c. 4.0
d. 5.0
(1 point)
71. The IS equation is Y = 500 20i. Which of the following combinations of interest and
income does not represent a point on the IS curve?
a. i = 0.02% and y = 450.
b. i = 0.05% and y = 400.
c. i = 0.07% and y = 360.
d. i = 0.10% and y = 300.
e. i = 0.04% and y = 420.
(1 point)
72. In an economy Marginal Propensity to Consume is estimated to be 0.75. If investment in the
economy increases by 50, equilibrium savings in the economy
a. Remain unchanged
b. Increase by 50 MUC
c. Increase by 100 MUC
d. Increase by 150 MUC
e. Increase by 200 MUC.
(1 point)
73. For an economy GDP deflator for the year 2001 is 175 and the base year is 1990. If real GDP
(in 1990 prices) for the year is 1000, nominal GDP for the year 2001 is
a. 71 MUC
b. 825 MUC
c. 1,000 MUC
d. 1,175 MUC
e. 1,750 MUC.
(1 point)
74. Net domestic capital formation in a country is 2000. Savings by private and public sectors in
the economy are 1800 and 100 respectively. Current account deficit for the economy is
a. 100 MUC
b. 200 MUC
c. 300 MUC
d. 400 MUC
e. 500 MUC.
(1 point)
432
Part III
75. In an economy there are three industries A, B and C. A sells goods worth Rs.600 to B and
goods worth Rs.500 to C. Consumers divide their expenditure equally between Bs goods and
Cs goods. If the national product is Rs.1,500 and if there are no other transactions than
mentioned above, the value added by industries B and C respectively are
Rs.100,
Rs.500
b.
Rs.150,
Rs.250
c.
Rs.600,
Rs.500
d.
Rs.750,
Rs.750
e.
Rs.1,100, Rs.1,500.
04
a.
04
(1 point)
7.0%
e.
7.0%.
d.
M
AC
3.0%
o.
c.
ef
.N
3.0%
2.5%
b.
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
a.
04
20
76. Suppose the rate of inflation is 2% and the real interest rate is 5%. The nominal interest rate
will be
433
Model Question Paper V

Suggested Answers
(b) According to the Keynesian model of output determination, the multiplier effect
represents the ratio of change in income as a result of change in investment. In a simple
Keynesian model, the value of multiplier is between 1 and infinity, which implies that the
change in investment will increase the output more than itself.
2.
(a) In the equation C = A + (MPC)Y, A and MPC represent autonomous investment and
marginal propensity to consume respectively. Autonomous investment does not change with
the income. It is independent to the income. Thus, autonomous investment acts as a
parameter to determine the level of consumption.
3.
(a) The operation of forces in an economy can be expressed in the form of a circular flow of
incomes and spending between households and firms. A household is a group of people
(consumers) earning incomes and spending them on goods and services produced by the
firms. Money passes from households to firms in return for goods and services produced by
firms and money passes from firms to households in return for factor services provided by
households.
4.
(d) Land and labor are called primary factors of production.
5.
(c) GDP Depreciation = NDP.
6.
(a) If the people put their unspent income into a bank it is only a savings but not an
investment because their intention is not to make money on that amount.
7.
(d) Unit of account function of money refers to act of money as a means of expressing the
value of different goods and services. When we speak of expressing the prices of goods in an
economy, we are speaking primarily of moneys role as a means to express the value of
goods and services.
8.
(a) Ceteris Paribus, an increase in the demand for money causes an increase in the interest
rates.
9.
(a) Stagflation represents a situation where there is high inflation and unemployment. Supply
shock means a drastic reduction in the supply such as crop failure due to bad weather, ban on
imports of a critical raw material, reduction in the supply oil by OPEC, etc. Supply-shock
shifts the AS curve towards left causing inflation.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
1.
iU
ni
10. (a) An expansion phase of the usual business cycle is characterized by increased AD, which
implies an upward shift in the aggregate demand curve.
Ic
fa
11. (b) Keynesian model assumed investment and government spending as exogenous variables.
Keynesian economists ignored the crowding out effect.
20
04
Th
e
12. (a) As we are considering NDP and not GDP, it is not required to deduct depreciation since
we have already deducted depreciation from GDP to arrive at NDP.
13. (b) In deciding whether to hold money on other interest-bearing assets, people will compare
the nominal interest rate on money and the nominal interest rate on the other investment.
14. (d) Technological advances increases the real returns to all factors of productions. For
example, if technological advances are made in rice production, farmers can produce more
quantity of rice with the same labor and land.
15. (d) C = f(Yd, W) represents that consumption C is a function of two independent
variables W and Yd.
16. (b) A steeper LM curve indicates less sensitivity in income level due to changes in interest
rates. Hence, when the LM curve is very steep, an increase in autonomous government
expenditure increases the interest rates, but will have little impact on income.
Part III
17. (c) Narrow money or M1 = Currency with the public + Demand deposits with the banking
system + Other deposits with RBI.
18. (c) Money Supply = [(1 + cu) /(r + cu)] x H.
Hence, when currency deposit ratio, Cu increases money supply increases, but high-powered
money, H remains the same.
19. (b) Transfer payments refers to payments of money (or goods and services) by a firm or
government to an individual or firm for which payer receives no consideration. E.g. gifts
given to foreign citizens, etc. As transfer payments are made without consideration, it does
not form part of GDP.
04
20
04
04
20. (b) In a simple model of a closed economy both the government expenditure and the
investment are assumed to the exogenous factors (note that exogenous factors are those
factors that are determined by the forces outside the economic model).
ef
.N
o.
M
AC
21. (b) The RBI money together with the Government money constitutes the monetary base
which is known as High Powered Money. H = Monetary liabilities of the RBI +
Government money, or H = Currency with the public + Reserves + Other Deposits with the
RBI. Government deposits with the RBI is a Non-Monetary Liabilities (NML) of the RBI and
hence it does not form part of high-powered money, H. Money supply = [(1 + Cu)/(Cu + r)] x
H, which implies that high-powered money is a part of money supply. If government deposits
with the RBI does not form part of H, then it does not become a component of money supply.
31
4-
02
27
-4
22. (b) Increase in autonomous investment spending will increase the income. As imports
depend on the income levels, imports also increase with the increase of income. With the
increased imports, the net export balance becomes negative from zero.
.IS
BN
:8
1-
23. (e) Speculative demand for money varies inversely with interest rates prevailing in the
market. If the frequency at which a person receives income is increased, transactionary
demand for money decreases. Transactionary demand for money varies positively with
income, but such variation is usually less than proportionate.
se
rv
ed
24. (a) When MPC = 0
1
= 1. Therefore, the equilibrium income would also decrease by the same
1 0
amount as decrease in investment.
ig
ht
re
Multiplier =
s.
Al
lr
25. (c)
Investment in plant and machinery can at the most be zero and cannot be negative. If we
do not undertake any investment in plant and machinery, the investment is zero.
b.
Investment in residential construction can at the most be zero and cannot be negative. If
we do not undertake any investment in residential construction, the investment is zero.
c.
Change in inventory can be either positive or negative. Positive if there is accumulation

of inventories and negative if there is de-accumulation of inventories.
Investment in non-residential construction can at the most be zero and cannot be

negative. If we do not undertake any investment in non-residential construction, the
investment is zero.
20
04
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
26. (b) All the points on IS curve indicate equilibrium in the goods market and all the points on
LM curve indicate equilibrium in the money market. Hence, the simultaneous equilibrium in
both the markets is possible only at the intersection of both the curves that is only at one
income level and interest rate.
27. (b) The time lag between the recognition of the policy need and actual policy change impact
reduces the likelihood that fiscal policy helps for the economic development.
28. (b) If an economy is currently experiencing both full employment and price stability, a major
tax reduction increases the demand for goods and services. Since already the economy is
operating at full employment, rapid increase in supply of goods and services is not possible in
near future. This leads to demand-pull inflation in the economy unless government
expenditures are reduced.
435
Macroeconomics
29. (a) High powered money (H) = Monetary liabilities of RBI + Government money =
Currency with the public (C) + Reserves (R) + Other Deposits with the RBI.
30. (b) Dividends received by an Indian company from its Malaysian subsidiary would be
included in the GNP of India because it is the factor income from abroad for India. However,
it is considered in the GDP of Malaysia because profits are earned within the boundaries of
Malaysia.
31. (e) The new classical economic school of thought advocates measures to create conditions in
which the free play of market forces can stimulate the economy to work more efficiently.
Because of its emphasis on supply aspects, New Classical Economics is called supply-side
Economics. Other schools of thought does not emphasize supply aspects.
20
04
04
1
1 +
04
32. (a) Balanced budget multiplier =
= Marginal propensity to import
= Investment coefficient
M
AC
= Marginal propensity to consumer
ef
.N
o.
Where,
(1 ) = Marginal propensity to save (MPS).
02
27
-4
Balanced budget multiplier is not effected by MPS, since it is part of both numerator and
denominator and the multiplier is equal to one if sum of and is equal to zero.
1-
31
4-
33. (b) Money earned abroad and remitted to home country is factor income received from
abroad, which is included in home country GNP and not in home country GDP.
se
rv
ed
.IS
BN
:8
34. (b) Simple Keynesian model assumes that aggregate supply (AS) curve is perfectly elastic
until full employment output is reached. This implies AS is independent of the price level and
the output depends on the AD, if the economy is operating at less than full employment level
of output.
re
AS
ht
Yf
Pr
es
s.
Al
lr
ig
AD
ty
35. (a) IS function is,
ve
rs
i
1
A
i

1 b(1 t) 1 b(1 r )
iU
ni
Y=
20
04
Th
e
Ic
fa
is the coefficient of interest rate sensitivity of private sector expenditure. For

1
b
(1
r)
1
given change in the interest rate, the Y will be larger if
is high. Therefore, a
1 b (1 r)
change in the money supply, which cause a change in the rate of interest, will have greater
1
effect on equilibrium income of
is larger.
1 b (1 r)
36. (e) When income of a consumer increases, some of the income is saved and some of the
income is spent on consumption. Therefore, MPC > 0 but < 1.
37. (e) GDPFC
= GDPMP Indirect taxes + Subsidies
If GDPFC > GDPMP, Subsidies > Indirect taxes.

38. (c) Net investment = Gross investment Depreciation
436
Part III
If Gross investment > Depreciation, Net investment > 0, hence other options are wrong.
39. (d) NPFC is also called a National Income.
40. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is
Y=
A
1 b(1 t)
Hence, equilibrium income depends on the position of IS curve only.
20
04
04
Part B: Problems
04
41. (a) M1 = Currency with public + Demand deposits with banks + Demand portion of savings
deposits with banks + Other deposits with RBI.
+ 11,254) = Rs.5,14,940 crore.
M
AC
= (2,89,636 + 3,884 + 1,982 + 9,972) + (1,98,212
M3 = M1 + Time deposits (i.e. fixed deposits) with banks
-4
Thus, M4 = (5,14,940) + 9,67,120 + 51,938 = Rs.15,33,998 crore.
ef
.N
o.
M4 = M3 + All Post Office Deposits
02
27
42. (e) Multiplier = 1/(MPS + MPI) = 1/(0.25 + 0.1) = 1/0.35 = 2.857
1-
31
4-
Thus, if autonomous expenditure increases by (200 60) = 140, then GDP increases by 2.857
x 140 = 400.
:8
43. (c) Total issues= Primary issues + Secondary issues
= Primary issues Intermediation ratio
ed
se
rv
Total Issue
Finance Ratio
re
National Income =
.IS
BN
Secondary issues
ht
Particulars
Pr
es
1,60,000
1,140 + 0.5Yd + 12i
ty
s.
Al
Total issues
44. (b)
1,00,000 0.60 = 60,000
lr
ig
Secondary issues
Year 2000
ni
iU
Yd
ve
rs
i
Consumption (C) = 1140 + 0.5Yd 12i

Y T + R = (Y 0.3Y + 600)
Ic
fa
Goods Market
20
04
Th
e
At equilibrium in goods market

Y
C+1+G+EM
1,140 + 0.5 (Y 0.3Y + 600) 12i + 900 + 0.1Y 100i + 3440 + 1636 150
0.15Y
Y =
7,266 + 0.3Y 112i
0.7Y =
7,266 112i
Y =
10,380 160i IS function
At equilibrium Y = 9,580
9,580
= 10,380 160i
160i
=
800
i
=
5%
437
Macroeconomics
Money Market
=
Ms
Md
Mt + Ma
Mt
0.25 Y
Ma
1,050 150i
Md
0.25Y + 1,050 150i
0.25 (9,580) + 1,050 (150 5) = 2,695 MUC.
04
Md
04
The money market is in equilibrium when
04
20
The money supply is 2,695 MUC.
45. (a) If the money supply increases by 190, new money supply is 2,695 + 190 = 2,885 MUC.
M
AC
LM function
=
Md
2,885
0.25Y + 1050 150i
0.25Y
1,835 + 150i
7,340 + 600i . LM Function
02
27
-4
ef
.N
o.
Ms
31
4-
At equilibrium, LM and IS functions are equal
.IS
BN
[Note: Y = (7,266 112i)/0.7 = 10,380 160i]
:8
1-
10,380 160i = 7340 + 600i
3040
4%
9740 MUC.
ht
re
se
rv
ed
760i
=EM
lr
ig
Trade Balance (TB)
s.
Al
Before increase in MS, TB
Pr
es
= 1,636 150 0.15 9,580 = 49 MUC.
ve
rs
i
ty
After increase in MS, TB
ni
= 1,636 150 0.15 9,740 = 25 MUC.
20
04
Th
e
Ic
46. (b)
fa
iU
Impact on TB =Decrease by 24 MUC.
High powered money
= Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI
= Financial Assets + Other Assets Non-monetary liabilities
Financial Assets
= Credit to Government + Credit to Banks + Credit
Net foreign exchange to Commercial sector + Assets

= 18,000 + 12,000 + 7,000 + 21,000 = Rs.58,000 million
Other Assets
= Rs.250 million
Non-monetary liabilities
= Government deposits + Other non-monetary liabilities
+ Net worth = 600 + 400 + 10,000 = Rs.11,000 million
438
Part III
= 58,000 + 250 11,000 = 47,250
Government money
= Rs. 750 million
High powered money (H) = 47,250 + 750

=Rs.48,000 million
=Hxm
Money multiplier (m)
1+ Cu
Cu + r
1 + 0.30
0.30 + 0.075
1.30
= 3.47
0.375
M
AC
04
20
04
04
Money supply (Ms)
ef
.N
o.
Money Supply in the economy
= 48,000 x 3.47 = Rs.1,66,560m.
4-
02
27
-4
47. (c) If foreign exchange reserves of India decline by Rs.600m, then high-powered money (H)
in the economy reduces to 48,000 600 = 47,400. Consequently, the money supply in the
economy decreases by 3.47 x 600 = Rs.2,082 million.
1-
31
48. (a) Ms = High-powered money (H) x Money multiplier (m)
BN
:8
If foreign exchange reserves decline by 600m, then high-powered money would also reduce
by 600m. Thus, H = 48,000 600 = 47,400.
ed
se
rv
1 + 0.30
0.30 + r
ht
1.30 x 47,400
1,66,560
ig
Pr
es
0.3699 0.30 = 0.0699
ve
rs
i
0.3699
ty
61,620 =
1,66,560
s.
Al
lr
0.30 + r
re
1,66,560 = 47,400
.IS
If RBI would like to sterilize
ni
6.99% = 7%
20
04
Th
e
Ic
49. (b)
fa
iU
RBI should decrease the CRR to 7%.
Item
Credit
Debit
Net
Current Account
I.
Merchandise
II. Invisible (a + b + c)
32,639
42,121
(9,482)
26,413
17,657
8,756
a.
Services
15,316
13,677
1,639
b.
Income
1,912
3,931
(2019)
c.
Transfers
9,185
49
9,136
59,052
59,778
(726)

(I + II)
439
Macroeconomics
835
10,724
(835)
1,922
12,585
4,246
2,049
72,363
5,569
5,569
(5,569)
04
(471)
20
471
04
3,500
130
555
Net
(726)
o.
M
AC
Debit
726
ef
.N
Item
Credit
A. Current account balance
Capital Account
i. Foreign investment
4,055
ii. Net external assistance
130
iii. Net commercial borrowings
(MT & LT)

iv. Net short-term borrowings
v. Other capital
12,646
B. Capital account balance
16,831
(i + ii + iii + iv + v)
C. Errors & omissions
2,049
D. Overall balance
77,932
(A + B + C)
E. Change in forex reserves
Thus, foreign exchange reserves increase by 5,569.
04
50. (d)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
51. (e) Change in money supply (Ms) = Money multiplier x Change in high powered money (H).
Since the overall BoP position is a surplus of US $5,569m, forex reserves increase by the
same amount, which leads to an increase in H by 5,569 x 50 = Rs.2,78,450m.
Ms
=
4 x 2,78,450 = Rs.11,13,800 m.
52. (e) National Income (NNPFC) = Sum of all factor incomes earned by domestic factors of
production
= Rent + Wages and salaries + Interest + Profits
= 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC.
53. (c) NNPFC = Sum of all factor income earned by domestic factors of production
= Rent + Wages and salaries + Interest + Profits
= 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC.
GDPMP = NNPFC + Depreciation + Indirect Taxes Subsidies NFIA
Depreciation
= Gross Investment Net investment
= 11,000 7,000 = 4,000 MUC
GDPMP = 40,000 + 4,000 + 4,200 700 0 = 47,500 MUC.
54. (d) Personal Income (PI) = National income Corporate profits + Dividends + Transfer
payments = 40,000 6,500 + 500 + 1,200 = 35,200 MUC.
55. (a) Net Domestic Savings (NDS) = Personal Savings + Business Savings + Government Savings.
Business Savings (Retained earnings) = Corporate Profits Corporate Profit Tax Dividends
= 6,500 5,000 500 = 1,000 MUC.
Government Savings = Net Tax Collections Government Expenditure Transfer payments
= (5,000+8,000+4,200700) 16,000 1,200 = 700 MUC.
NDS = 5,600 + 1,000 700 = 5,900 MUC.
56. (b) The consumption function for an economy is ascertained as
d
Ct = 250 + 0.60 Y t + 0.20 Ct1
d
Where Ct and Ct1 denote consumption in period t and t1 respectively and Y t is the
disposable income in period t.
If there is steady state level of consumption, then Ct = Ct-1. Thus, Ct = 250 + 0.6Yd + 0.2Ct
Or, 0.8Ct = 250 + 0.6Yd
Or, Ct = 312.5 + 0.75Yd
Thus, if Yd = 500, then Ct = 312.5 + 0.75(500) = 687.5 MUC.

440
Part III
57. (c) Acceleration Coefficient (A)
Investment
Change in Income
2000
= 4.
500
58. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector Net non-monetary liabilities of the
banking sector +
2000+3000+2200-1200+ Government money
04
Rs.6200billion =
Growth rate of population = 8 6 = 2%.
M
AC
60. (d) Velocity of money
o.
Total expenditure(PY)
Money supply (M)
ef
.N
-4
Total expenditure = C + I + G = 500 + 170 + 140 = 810
02
27
Money supply = 810/5 = Rs.162cr.
4-
61. (d) National savings = Private savings + Public savings
1:8
The answer is (d).
ed
.IS
BN
(1 b) (1 t )
. G
1 b (1 t )
= Marginal Propensity to Consume = 0.75
= tax rate = 0.20
ig
ht
G = 100
se
rv
re
Where
31
Private savings = 1500 (500) = 2000 MUC.
62. (b) BS =
04
59. (a) Growth in per capita income = Growth in economy Growth rate of population
20
04
Government money = Rs.200billion.
lr
(1 0.75) (1 0.20)
100 =50 MUC.
1 0.75 (1 0.20)
s.
Al
Pr
es
BS
ty
ve
rs
i
ni
20
04
Th
e
Ic
fa
iU
64. (d) At break-even level of disposable income, savings are zero.
S
0.25 Yd
Yd
= 150 + 0.25Yd = 0
= 150
=
150
= 600 MUC.
0.25
7, 000
= Rs.3,500.
2
66. (b) Notional income = wages and salaries + Interest income + Rental income + Profit
65. (d) Average holding of money is Y/2 =
Profit
= 100 60 15 10 = 15 BUC.
67. (d) 0.5Y = 1250 75i
Y = 2500 150i
441
Macroeconomics
68. (c) Income of the economy for period t is equal to Aggregate Supply during the period t.
Based on the assumption that AS lags AD by one period, income for period t+1 will be
equivalent to AD during period t. Therefore, income during period t+1 will increase by 10
as the AD in period d increases by 10. Hence the answer is (c).
69. (d) For any economy APS + APC = 1.
Therefore, if APS = -0.05, APC = 1.05
70. (b) Multiplier =
1
1 (1 t )
04
= MPC = 1 MPS = 1 0.25 = 0.75
Where
20
1
1
=
= 2.5.
1 0.75 (1 0.20) 0.40
Multiplier =
04
04
t = tax rate
M
AC
71. (b) IS function Y = 500 20i
i = 5%,
Y = 500 (20 5)
= 400
i = 4%,
Y = 500 (20 4)
= 420
ef
.N
= 360
Y = 500 (20 7)
-4
i = 7%,
o.
Y = 500 (20 10) = 300
If, i = 10%,
02
431
1
. I
1
1
.50 = 200
0.25
ed
.IS
BN
:8
1-
se
rv
72. (b) Y
27
i = 2%,
Y = 500 (20 2) = 460
Hence, (a) does not fall on the IS curve.
MPS = 1 MPC
ht
ig
= 0.25 200 = 50
re
S = MPS Y
Pr
es
s.
Al
lr
Savings increase by 50.

73. (e) Nominal GDP
ve
rs
i
ty
GDP deflator in the current year

= Re al GDP
GDP deflator in the base year
fa
iU
ni
175
100 = 1,000
100 = 1,750.
100
20
04
Th
e
Ic
Nominal GDP for the year 2001 = 1,750.

74. (c) S I = CAB
S = 1800 100 = 1700
I = 2000
CAB = 1700 2000 = 300 MUC
Current Account Deficit = 300 MUC.
75. (b) National product = Rs.1500. Since this is equally spent on industries B and C, expenditure
on B & C will be 1500/2 = Rs.750.
Value added = Value of output Value of input
For Industry B, 750 600 = Rs.150
Industry C, 750 500 = Rs.250.
76. (d) Nominal rate of interest = Real rate of interest + Inflation = 5 + 2 = 7%.
442

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The Icfai University Press

2004 The Icfai University Press.

retrieval system, used in

transmitted in any form

otherwise without prior

from The Icfai University

Ref. No. MACWB 04200404

For any clarification regarding this book, the students

suggestions from students for improvement in future

Brief Summaries of Chapters

Part I: Questions on Basic Concepts and Answers (with Explanatory Notes)

Part II: Problems and Solutions

Part III: Model Question Papers (with Suggested Answers)

Questions on Basic Concepts and Answers (with Explanatory Notes)

Brief Summaries of Chapters

Problems and Solutions

Model Question Papers (with Suggested Answers)

Brief Summaries of Chapters

Macroeconomics is the study of economy as a whole. As a field of study it analyzes the

Measurement of Macroeconomic Aggregates

It is important to distinguish between real and nominal values of macroeconomic aggregates.

Measurement of National Income

The Simple Keynesian Model of Income Determination

Income Determination Model including Money and Interest

IS-LM model is constructed by introducing interest rate as an additional determinant of

Fundamentals of Aggregate Demand and Aggregate Supply

Money Supply and Banking System

Aggregate Supply, Price Level and Employment: Macroeconomic

Aggregate Supply, Price Level and Employment Macroeconomic

Post-Keynesian Macroeconomics Monetarism, Rational Expectations and

A W Phillips showed an inverse relationship between the ratio of change of money

Economic Fluctuations and Unemployment

The inflation may be demand-pull or cost-push. A demand-pull inflation refers to increase in

The Open Economy and Balance of Payments: Indias Balance of Payments

Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government

Modern Macroeconomics: Monetary Policy and Interest Rate Structure

Minimum reserve requirements

Discount or bank rate

Open Market Operations (OMO).

Part I: Questions on Basic Concepts

Gross domestic product.

Both (a) and (c) above.

Consumer price index.

The relationship between aggregate consumption expenditure and aggregate income of

None of the above.

Gross Domestic Product and Gross National Product

Gross Domestic Product and GDCF (Gross Domestic Capital Formation)

National Disposable Income and Gross Domestic Product

GDP and Aggregate Consumption

National Disposable Income and Gross National Product.

Which of the following variable(s) will come under flow variable(s)?

Foreign exchange reserves.

Gross domestic savings is the difference between

Both (a) and (b) above.

Making good the depreciation on existing fixed assets

Both (a) and (b) above

All of (a), (b) and (c) above.

Which of the following relationships is not correct?

Net national savings = National Disposable Income (NDI) Private consumption

Gross domestic saving = Net domestic saving + Depreciation provision.

Gross domestic investment = Gross fixed investment + Change in inventories.

Gross domestic product = Consumption + Gross investment + Government expenditure