Economics - II (MB142): July 2006

Economics - II (MB142): July 2006

• Answer all questions.
• Marks are indicated against each question.
1. According to the classical economists, full employment corresponds to a period when
(a) Actual GDP is less than potential GDP
(b) Actual GDP equals potential GDP
(c) Actual GDP is greater than potential GDP
(d) Consumption expenditure equals disposable income
(e) Savings equal consumption expenditure.
(1 mark)
< Answer >
2. Suppose the rate of inflation is 2% and the real interest rate is 1%. The nominal interest rate will be
(a) 2.5% (b) 3.0% (c) –3.0% (d) 7.0% (e)
–7.0%.
(1 mark)
< Answer >
3. The following information are given for a hypothetical economy:
Finance ratio 0.25
Intermediation ratio 0.78
Financial interrelation ratio 1.50
New issues 24,000 MUC
The national income is
(a) 164,408 MUC (b) 165,480 MUC (c) 170,880 MUC
(d) 163,235 MUC (e) 165,703 MUC
(2 marks)
< Answer >
4. The following information is extracted from National Income Accounts of a country:
The national income for the economy will be
(a) 30,222 MUC (b) 31,000 MUC (c)
29,670 MUC
(d) 28,750 MUC (e) 30,406 MUC.
(2 marks)
Particulars
Million Units of
Currency (MUC)
NDP at market prices 33,878
Net factor income abroad 92
Depreciation 1,800
Subsidies 708
Indirect taxes 4,272
< Answer >
5. The following information is extracted from National Income Accounts of a country:
Particulars MUC
NDP at market prices 10,000
Gross domestic investment 1,600
Subsidies 200
Net Domestic investment 1,300
Indirect taxes 1,900
< Answer >
GDP at factor cost for the country will be
(a) 8,000 MUC (b) 8,400 MUC (c)
8,600 MUC
(d) 8,200 MUC (e) 8,250 MUC.
(2 marks)
Indirect taxes 1,900
6. The following data pertains to a hypothetical economy for the year 2005-06:
The subsidies will amount to
(a) 2,520 MUC (b) 2,000 MUC (c)
2,100 MUC
(d) 3,500 MUC (e) 3,750 MUC.
(1 mark)
Particulars MUC
GNP at Factor Cost 95,023
Indirect taxes 14,723
GNP at market prices 1,07,226
< Answer >
7. Which of the following statements is true?
(a) Net national product at factor cost plus depreciation equals gross national product at market prices
(b) National income minus corporate profits minus personal taxes plus transfer payments equals
personal income
(c) Personal disposable income minus personal taxes equals personal consumption
(d) Gross domestic product at market prices minus net factor income from abroad equals gross
national product at market prices
(e) Per capita income equals the summation of national income and population.
(1 mark)
< Answer >
8. The following information is extracted from National Income Accounts of an economy:
Investment by business sector = 100 MUC
Corporate profit tax = 50 MUC
Dividends paid by the business sector = 15 MUC
Retained earnings = 20 MUC
Corporate profits for the economy is
(a) 20 MUC (b) 35 MUC (c) 85 MUC (d) 150 MUC (e)
185 MUC.
(1 mark)
< Answer >
9. In country X, if NNP at market prices remain constant and depreciation increases compared to the
previous year, then GNP at market prices will
(a) Increase
(b) Decrease
(c) Increase by an amount equal to the increase in depreciation
(d) Decrease by an amount equal to the increase in depreciation
(e) Not change.
(1 mark)
< Answer >
10. The following is the information from national accounts of an economy:
The GDP at market prices is
(a) 24,800 MUC (b) 30,200 MUC (c) 68,400 MUC (d) 52,350 MUC (e)
45,600 MUC.
(2 marks)
Particulars MUC
Direct taxes 2,400
Indirect taxes 11,400
Factor income paid abroad 12,000
Factor income received from abroad 9,000
Depreciation 12,000
Subsidies 6,000
National income 48,000
< Answer >
11. Which of the following happens at the equilibrium level of output defined by the Keynesian cross?
I. There are unintended inventories.
II. Aggregate demand equals national income.
III. Planned investment equals planned savings.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (II) and (III) above
(e) Both (I) and (II) above.
(1 mark)
< Answer >
12. In a macroeconomic model without foreign trade or government spending, where Y is the national
income, C is consumption, I is investments and S is savings, aggregate demand is represented by
(a) Y = C (b) Y = S (c) Y = S+I (d) Y = C+I
(e) Y = I.
(1 mark)
< Answer >
13. In a closed economy, if the MPC is 0.75, a decrease in planned investment of 20 MUC will cause
aggregate output to decrease by
(a) 15.00 MUC (b) 20.00 MUC (c) 26.67 MUC (d) 80.00 MUC (e) 100.00
MUC.
(1 mark)
< Answer >
14. The following functions relate to a hypothetical economy:
S = – 50 + 0.25Y and I = 65 –220i.
If the rate of interest is 10%, the equilibrium output is
(a) 375 units (b) 372 units (c) 364 units (d) 368 units (e)
380 units.
(2 marks)
< Answer >
15. Open market purchases of government bonds by the Reserve Bank of India will have the tendency to
(a) Increase both the interest rate and the money supply
(b) Decrease both the interest rate and the money supply
(c) Increase interest rate, but decrease money supply
(d) Decrease interest rate, but increase money supply
(e) Leave both money supply and interest rate unchanged.
(1 mark)
< Answer >
16. The following information is extracted from the National Income Accounts of an economy for the year
2005-2006:
The personal income for the economy will be
(a) Rs.50,000 Cr (b) Rs.55,000 Cr (c)
Rs.51,500 Cr
(d) Rs.57,500 Cr (e) Rs.53,000 Cr.
(1 mark)
Particulars Rs. in Cr.
Indirect taxes 14,000
NNP at market prices 1,00,000
Subsidies 2,000
Corporate profit taxes 6,500
Retained profit 30,000
< Answer >
17. If the marginal propensity to save is 0.2, the multiplier is
(a) 0.5 (b) 0.4 (c) 5.0 (d) 4.0
(e) 1.0.
(1 mark)
< Answer >
18. The consumption function for an economy is given as
C = 1,000 + 0.80Yd.
The level of disposable income at which the consumption is equal to disposable income is
(a) 2,000 MUC (b) 3,000 MUC (c) 4,000 MUC (d) 5,000 MUC (e)
6,000 MUC.
(1 mark)
< Answer >
19. In a closed two-sector economy, there are 50 individuals. All the individuals have identical consumption
functions but have different disposable incomes. One of the individual’s consumption function is C =
100 + 0.7Yd. Aggregate disposable income in the economy is 50,000 MUC. The level of investment in
the economy is
(a) 10,000 MUC (b) 11,000 MUC (c) 12,000 MUC (d) 13,000 MUC (e) 14,000
MUC.
(2 marks)
< Answer >
20. Which of the following monetary policies increases aggregate demand and output?
(a) An open market sale of government securities
(b) Any policy that injects reserves into the banking system
(c) An increase in the discount rate
(d) An increase in the reserve requirement
(e) An increase in the interest rate.
(1 mark)
< Answer >
21. Which of the following is not a stock variable?
(a) Foreign exchange reserves (b) Public debt (c) Wealth of a
country
(d) Inflation (e) Money supply.
(1 mark)
< Answer >
22. The balance of payments statement is divided into
(a) Current account and the trade account
(b) Trade account and the capital account
(c) Current account and the capital account
(d) Current account and the reserve account
(e) Reserve account and the savings account.
(1 mark)
< Answer >
23. In an inflationary period, the appropriate policy for the RBI would be to
(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) Buy government securities in the open market.
(1 mark)
< Answer >
24. A current account deficit implies that
(a) There is net debit balance in the merchandise account
(b) There is net credit balance in the merchandise account
(c) Foreign exchange outflows on account of imports of goods and services and gifts made exceed
inflows on account of exports of goods and services received
(d) There is a decrease in foreign exchange reserves
(e) There is an increase in foreign exchange reserves.
(1 mark)
< Answer >
25. 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 marks)
< Answer >
26. The following information is available from the consolidated balance sheet of the banking sector:
Money supply in the economy is
(a) Rs.200 billion (b) Rs.6,000 billion (c) Rs.6,200
billion
(d) Rs.7,400 billion (e) Rs.7,600 billion.
(1 mark)
Item Rs. Billion
Net Bank Credit to the Government 2,000
Bank Credit to the Commercial Sector 3,000
Net Foreign Exchange Assets of the Banking Sector 2,200
Net Non-Monetary Liabilities of the Banking Sector 1,200
Government Currency Liabilities to the Public 200
< Answer >
27. If planned consumption equals 70 + 0.80 Yd and planned investment is 90 MUC, the equilibrium level
of income is
(a) 100 MUC (b) 200 MUC (c) 400 MUC (d) 800 MUC (e)
1,000 MUC.
(2 marks)
< Answer >
28. The term monetised deficit refers to
(a) Government deficit on payments disbursement
(b) Net RBI credit to the central government
(c) Deficit of the RBI due to outstanding dues
(d) Difference between government payments and receipts in monetary terms
(e) The revenue deficit of the government.
(1 mark)
< Answer >
29. Which of the following happens if the consumer price index has doubled?
(a) Per capita real income is reduced by half
(b) Per capita income is doubled
(c) The average prices in the consumer’s basket with respect to a base year are doubled
(d) All consumer goods prices are doubled
(e) Prices of all commodities in the economy are doubled.
(1 mark)
< Answer >
30. The production possibility curve illustrates the basic principle that
(a) An economy will automatically seek that level of output at which all of its resources are employed
(b) An economy’s capacity to produce increases in proportion to its population size
(c) If all the resources of an economy are in use, more of one good can be produced only if less of
another good is produced
(d) Since human wants are limited and resources are unlimited, more of both goods can be produced
(e) There is a direct relation between consumption and investment.
(1 mark)
< Answer >
31. The following table shows foreign transactions of a hypothetical economy:
What is the current account balance?
(a) Rs.137 million (surplus) (b) Rs.137 million (deficit)
(c) Rs.60 million (deficit) (d) Rs.60 million (surplus)
(e) Rs.100 million (deficit).
(2 marks)
Particulars Rs. million
Exports 120
Imports 180
Investment income received 213
Investment income paid 260
Net transfers received -30
< Answer >
32. Which of the following best describes a typical business cycle?
(a) Stagflation followed by inflationary economic growth
(b) Trade surpluses followed by trade deficits
(c) Inflation followed by unemployment
(d) Economic expansions followed by economic contractions
(e) Monetary expansion followed by a monetary contraction.
(1 mark)
< Answer >
33. Because the personal income tax is an automatic stabilizer, which of the following is true?
(a) Inflationary gaps are impossible
(b) The budget deficit increases during a recession
(c) The deficit needed to cure a recessionary gap increases
(d) The structural deficit grows during a recession
(e) Budget deficit remains the same.
(1 mark)
< Answer >
34. If the price increases due to increase in labor cost per unit of output, then it is termed as
(a) Demand pull-inflation (b) Wage-push inflation
(c) Profit-push inflation (d) Supply-shock inflation (e) Disinflation.
(1 mark)
< Answer >
35. Which of the following is classified as cost-push factors of inflation?
(a) Pressure of growing population
(b) Hike in international prices of crude oil
(c) Tax evasion by assesses
(d) Hoarding and speculative activities of middle men
(e) Increase in supply of money.
(1 mark)
< Answer >
36. According to classical economics, the economy will always tend toward full employment due to
(a) Minimum wages (b) Flexible wages and prices
(c) Extended periods of unemployment (d) Inequality between saving and investment
(e) Say's law of market.
(1 mark)
< Answer >
37. The difference between a country’s merchandise exports and its merchandise imports is the
(a) Balance of payments (b) Balance of trade
(c) Balance of settlement (d) Capital account balance
(e) Budget deficit.
(1 mark)
< Answer >
38. Which of the following statements is not true?
(a) 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
(d) GDP deflator reflects on the purchasing power of the people
(e) GDP deflator measures economic growth.
(1 mark)
< Answer >
39. 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.
(2 marks)
< Answer >
40. 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
250 MUC, what would happen to the money supply?
(a) Decline by 1,200 MUC (b) Increase by 1,200 MUC
(c) Decline by 1,820 MUC (d) Increase by 1,820 MUC (e) Decline by 1,480
MUC.
(2 marks)
< Answer >
41. An economy produces only two commodities – bread and butter. During the year 2005, 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 2004 as the base year)
GDP deflator for the year 2005 was
(a) 125 (b) 142 (c) 140 (d) 130
(e) 121.
(2 marks)
Year
Price of Bread
(Rs. per unit)
Price of Butter
(Rs. per unit)
2004 20 15
2005 25 20
< Answer >
42. The following are the excerpts from the balance sheet of a Central Bank.
If the government money is 175 MUC, the high powered money in the economy is
(a) 12,000 MUC (b) 12,075 MUC (c) 13,000 MUC (d) 18,250 MUC (e) 11,900
MUC.
(2 marks)
Particulars MUC
Notes in circulation 700
Other deposits 350
Other non-monetary liabilities 700
Statutory and contingency reserves 2,940
Credit to Central Government 7,840
Shares and loans to financial institutions 3,850
Central bank claims on Commercial banks 2,450
Net foreign exchange assets 1,050
Other assets 350
< Answer >
43. The following data pertains to a hypothetical economy.
The velocity of money in the economy is
(a) 4 (b) 3 (c) 5 (d) 6
(e) 7.
(2 marks)
Particulars MUC
Private final consumption expenditure 5,250
Fixed capital formation 1,575
Increase in inventories 350
Government final consumption expenditure 1,120
Exports 280
Imports 210
Money supply 1,673
< Answer >
44. Which of the following sequences expresses the relationship among money supply, nominal interest
rate, investment and gross national product assuming demand for money to be constant?
(a) When money supply decreases, nominal interest rate decreases, investment decreases and real
gross national product decreases
(b) When money supply decreases, nominal interest rate decreases, investment increases and nominal
gross national product increases
(c) When money supply decreases, nominal interest rate increases, investment increases and real
gross national product increases
(d) When money supply increases, nominal interest rate decreases, investment increases, nominal
< Answer >
gross national product increases
(e) When money supply increases, nominal interest rate, investment and real gross national product
remains the same.
(1 mark)
45. Recession is defined as
(a) Two or more quarters of increasing inflation
(b) The period after the trough of a business cycle
(c) The period before the peak of the business cycle
(d) Two or more quarters of declining output
(e) Two or more quarters of declining inflation.
(1 mark)
< Answer >
46. An underdeveloped country, due to lack of an effective Central banking system, has to rely on fiscal
policy alone to decide about its economic policies. Here, the term fiscal policy refers to
(a) Changes in the quantity of money designed to affect interest rates
(b) Policies related to quotas
(c) Composition of money supply
(d) Revenue and expenditure policies to achieve full employment
(e) Measures to control inflation.
(1 mark)
< Answer >
47. The following data pertains to a hypothetical economy.
Consumption function (C) = 70 + 0.75Yd
Investment (I) = 80 MUC
Government spending (G) = 70 MUC
Tax function (T) = 0.2Y
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.
(2 marks)
< Answer >
48. Consider the following data:
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.
(2 marks)
Particulars MUC
Factor income paid abroad by the business sector 10
Factor income received by household sector 160
Transfers to household sector 20
Wages and salaries paid by the business sector 100
Dividends paid by the business sector (of which 10 MUC is paid
abroad)
20
Household savings 60
Factor income received from abroad by the household sector 20
< Answer >
49. In an economy the GDP at factor cost is Rs.60,000, depreciation is Rs.6,000. GNP at market prices is
Rs.75,000 and indirect taxes are Rs.5,000. There are no subsidies in the economy. The net factor
income from abroad is
(a) Rs.5,000 (b) Rs.15,000 (c) Rs.10,000 (d) Rs.20,000 (e)
Rs.25,000.
(2 marks)
< Answer >
50. In a two sector economy, if multiplier has a value of 3.0, it implies that
(a) If income increases by Rs.3, investment will increase by Rs.9
(b) If investment increases by Re 1, consumption will increase by Rs.2
(c) If investment increases by Re 1, consumption will increase by Rs.3
(d) If investment increases by Re1, consumption will increase by Rs.1.1
(e) If investment increases by Rs.2, consumption will increase by Re 1.
(1 mark)
< Answer >
51. Which of the following statements are true according to the classical economists?
(a) According to classical economists, government must focus on policies that will boost aggregate
demand
(b) According to classical economists, only monetary factors are important while the real variables
have no role to play
(c) The classical aggregate supply curve for the whole economy is upward sloping from left to right
(d) According to classical economists, there is need for affirmative government action to direct the
capitalist system
(e) The classical school believes that money is used only as a medium of exchange and has no
intrinsic value of its own.
(1 mark)
< Answer >
52. The following are the indicators of financial development of an economy for the year 2005-06.
If the Net Physical Capital Formation and the new issues for the year 2005-06 were 42,500MUC and
30,000 MUC respectively, the financial interrelation ratio was
(a) 1.2 (b) 1.4 (c) 2.4 (d) 0.6
(e) 0.1.
(2 marks)
Finance Ratio 0.25
Intermediation Ratio 0.70
< Answer >
53. The following data is taken from balance sheet of a Central Bank:
The Government money in the economy is 1,050 MUC and Money supply in the economy is 80,000
MUC. If Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated
to be 20 percent, Net foreign exchange assets with the Central Bank are
(a) 8,500 MUC (b) 9,000 MUC (c) 9,750 MUC (d) 10,050 MUC (e)
10,000 MUC.
(2 marks)
Particulars MUC
Net worth 6,000
Credit to government 10,000
Credit to commercial sector 5,000
Government deposits 150
Credit to banks 4,000
Other non-monetary liabilities 3,000
Other deposits with the central bank 50
Other assets 100
< Answer >
54. The four stages of the business cycle in a sequential form are
(a) Recession, boom, depression, recovery
(b) Boom, recession, recovery, depression
(c) Boom, recession, depression, recovery
(d) Depression, recovery, boom, recession
(e) Recovery, recession, depression, boom.
(1 mark)
< Answer >
55. Which of the following statements pertaining to Phillips curve is not true?
(a) In the short run, unemployment does not return to its natural rate and there exists a trade-off
between inflation and unemployment
(b) If the expected inflation rises, the Phillips curve shifts upward to the right, indicating higher
inflation at each unemployment level
(c) The position of the short-run Phillips curve depends on the expectations regarding inflation
(d) In the long-run the Phillips curve becomes vertical
(e) In the long run, the policymakers will have enough time to depress aggregate demand to lower
inflation and raise unemployment.
(1 mark)
< Answer >
56. An important difference between the approaches of the Classical economists and Keynesian economists
to achieve a macroeconomic equilibrium is that
(a) Keynesian economists actively promote the use of fiscal policy while the classical economists do
not
(b) Keynesian economists actively promote the use of monetary policy to improve aggregate economic
performance while classical economists do not
(c) Classical economists believe that monetary policy will certainly affect the level of output while
Keynesians believe that money growth affects only prices
(d) Classical economists believe that fiscal policy is an effective tool for achieving economic stability
while Keynesians do not
(e) Keynesian economists advocate rational expectations while classical economists do not.
(1 mark)
< Answer >
57. Expansionary fiscal policy refers to
(a) Increase in government spending and increase in money supply
(b) Increase in government spending and decrease in taxes
(c) Decrease in government spending and decrease in money supply
(d) Decrease in government spending and increase in taxes
(e) Increase in government spending and increase in taxes.
(1 mark)
< Answer >
58. If consumption is Rs.10 million when the disposable income is Rs.10.5 million and consumption is
Rs.10.5 million when the disposable income is Rs.11.5 million, the marginal propensity to consume is
(a) 0.25 (b) 0.50 (c) 0.75 (d) 0.80
(e) 0.90.
(1 mark)
< Answer >
59. If the Reserve Bank of India wanted to reduce the money supply, which of the following would not be
appropriate?
I Increase the reserve requirement.
II Decrease the monetary base.
III Decrease the discount rate.
IV Sell its holdings of government securities.
(a) Only (I) above (b) Only (III) above
(c) Both (I) and (II) above (d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
60. Financial assets of the RBI does not include
(a) RBI’s credit to government
(b) Credit to commercial banks
(c) RBI’s credit to commercial sector
(d) Net foreign exchange assets with RBI
(e) Furniture and buildings of RBI.
(1 mark)
< Answer >
61. Which of the following is not a major objective of the Reserve Bank of India?
(a) To control the money supply
(b) To keep a check on taxes and revenue
(c) To keep inflation low
(d) To try to maintain full employment
(e) To ensure stable exchange rate.
(1 mark)
< Answer >
62. Which of the following is considered to be the most appropriate measure for the standard of living of a
country, like India?
(a) GDP at market prices (b) GNP at factor cost (c) Per capita GDP
(d) National income (e) Personal income.
(1 mark)
< Answer >
63. The following data pertains to national income aggregates of a hypothetical economy:
Consumption function (C) = 200 + 0.80Yd, where Yd is disposable income
Investment (I) = 1,000 MUC
Government spending (G) = 400 MUC
Taxes (T) = 100 MUC
The equilibrium level of savings in the hypothetical economy is
(a) 1,300 MUC (b) 1,400 MUC (c) 1,200 MUC (d) 1,500 MUC (e)1,600
MUC.
(2 marks)
< Answer >
64. Which of the following is true if, for a given period, there is no change in the foreign exchange reserves
of a country?
(a) Balance in the current account is equal to the balance in capital account
(b) Surplus (deficit) in the current account is equal to Deficit (surplus) in the capital account
(c) Current account balance is zero
(d) Trade balance is zero
(e) Capital account balance is zero.
(1 mark)
< Answer >
65. 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.
(1 mark)
< Answer >
66. In a two-sector economy the marginal propensity to save is constant at 0.25 and the break-even 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.
(2 marks)
< Answer >
67. Which of the following would you suggest to counter a recession?
(a) Decrease in government expenditure (b) Decrease in transfer payments
(c) Decrease in the discount rate (d) Decrease in the money supply
(e) Increase in the tax rate.
(1 mark)
< Answer >
68. Depreciation is defined as
(a) The sum of gross investment and net investment
(b) The difference between gross investment and net investment
(c) The ratio of gross investment to net investment
(d) The ratio of net investment to gross investment
(e) The difference between consumption and gross investment.
(1 mark)
< Answer >
69. In a two-sector economy, the marginal propensity to consume (MPC) is estimated to be 0.6. To bring
about a Rs.500 billion change in equilibrium national income (Y), the required increase in corporate
investment (I) is
(a) Rs.125 billion (b) Rs.200 billion (c) Rs.240 billion
(d) Rs.300 billion (e) Rs.360 billion.
(2 marks)
< Answer >
70. If M is the money stock, V is the velocity of circulation, P is the general price level and Q is the level of
output, Which of the following equations expresses the quantity theory of money?
(a) MV = P + Q (b) MV = P/Q (c) MV = PQ (d) MV = P-Q (e) MV
= Q/P.
(1 mark)
< Answer >
71. Suppose that people hold 25% of their total demand for money in currency. If the total demand for
money is Rs.10, 000 and the reserve ratio is 12%, then the amount required by banks to meet the reserve
requirement is equal to
(a) Rs.900 (b) Rs.2,750 (c) Rs.3,000 (d) Rs.4,500 (e)
Rs.7,500.
(2 marks)
< Answer >
72. The devaluation in the value of rupee is aimed at
(a) Increasing imports (b) Increasing exports
(c) Decreasing exports (d) Decreasing national income
(e) Decreasing the rate of inflation.
(1 mark)
< Answer >
73. The following data pertains to national income aggregates of a hypothetical economy:
Consumption function (C) = 200 + 0.80Yd, where Yd is disposable income
Investment (I) = 500 MUC
Government spending (G) = 200 MUC
Taxes (T) = 100 MUC
The equilibrium level of income is
(a) 1,640 MUC (b) 4,100 MUC (c)
4,200 MUC
(d) 4,300 MUC (e) 4,400 MUC.
(2 marks)
< Answer >
74. The following data is extracted from the National Income accounts of an economy:
The rate of inflation in the economy for the year 2005-06 was
(a) 7.5% (b) 10.0% (c) 12.5% (d) 15.0% (e)
20.0%.
(1 mark)
Year Nominal GNP GNP deflator
2004-05 3,000 200
2005-06 4,500 225
< Answer >
Suggested Answers
Economics - II (MB142): July 2006
75. Consider the following information:
The money multiplier is
(a) 5.75 (b) 6.50 (c) 7.75 (d) 8.25
(e) 9.50.
(1 mark)
High powered money Rs. 8,800 cr.
Currency deposit ratio in the economy 15%
Cash reserve requirement of the central bank 5%
< Answer >
76. Disguised unemployment arises when
(a) There is downturn in business activities
(b) There are structural changes in the economy
(c) Marginal productivity of labor is zero
(d) Marginal productivity of labor is increasing
(e) Marginal productivity of labor is decreasing.
(1 mark)
< Answer >
1. Answer : (b)
Reason : According to the classical economists, full employment corresponds to a situation where
actual and potential GDP are equal. When actual GDP is less than potential GDP, the
resources are not being fully utilized and when actual GDP is more than potential GDP, there
is overutilisation of the existing resources.
< TOP >
2. Answer : (b)
Reason : Nominal rate of interest = Real rate of interest + Inflation = 1 + 2 = 3%
< TOP >
3. Answer : (c)
Reason : National income = total issues / finance ratio
Total issues = primary issues + secondary issues
Secondary issues = intermediation ratio × new issues
0.78×24,000 = 18,720
Total issues = 24,000 + 18,720 = 42,720
National income = 42,720 / 0.25 = 170880
< TOP >
4. Answer : (e)
Reason : National income = NNP at factor cost
= NDP at factor cost + Net income from abroad
NDP at market prices – indirect taxes + subsidies + net factor income from abroad
33878 – 4272 + 708 + 92
= 30406
< TOP >
5. Answer : (c)
Reason : GDPFC
= NDPMP + Depreciation – Indirect Taxes + Subsidies
Depreciation = Gross domestic investment – Net domestic investment
= 1,600 – 1,300
= 300.
GDPFC = 10,000 + 300 – 1,900 + 200
= 8,600 MUC.
< TOP >
6. Answer : (a)
Reason : Subsidies= GNP at Factor Cost + Indirect Taxes – GNP at Market Prices.
= 95,023 + 14,723 – 1,07,226 = 2,520.
< TOP >
7. Answer : (b)
Reason : National income minus corporate profits minus social security taxes plus transfer payments
equal personal income. This is the true statement.
< TOP >
8. Answer : (c)
Reason : Corporate profits = Corporate profit tax + Dividends + Retained earnings
= 50 + 15 + 20 = 85
< TOP >
9. Answer : (c)
Reason : NNP at market prices + depreciation = GNP at market prices. Thus, if NNP at market prices
remain constant, GNP at market prices rises by a amount equal to the rise in depreciation.
(c) It is the answer.
< TOP >
10. Answer : (c)
Reason : National income = NNP at factor cost
NNP at factor cost = GDP at market price – Indirect taxes + subsidies + NFIA – Depreciation
Or, GDP at market price = NNP at factor cost + Indirect taxes – subsidies - NFIA +
Depreciation
= 48000 + 11400 – 6000 – (– 3000) + 12000 = 68400 MUC.
Where NFIA = (Factor income received from abroad – Factor income paid abroad) = (9000 –
12000) = -3000 MUC
< TOP >
11. Answer : (d)
Reason : At the equilibrium level of output as defined by the Keynesian cross, the aggregate demand
equals national income and planned investment equals planned savings.
(d) is the answer.
< TOP >
12. Answer : (d)
Reason : In a macroeconomic model without foreign trade or government investment, aggregate
demand is the sum of consumption expenditure and investment expenditure. When there is
foreign trade and government spending, aggregate demand = C +I+G+ (X-M)
< TOP >
13. Answer : (d)
Reason : When the MPC is 0.75, the multiplier is 4.A decrease in planned investment of 20 MUC will
cause the output to decline by 20 × 4 = 80 MUC
[The multiplier is given by 1 / (1-MPC) = 1 / 1-0.75 = 1 / 0.25 = 4]
(d) is the answer.
< TOP >
14. Answer : (b)
Reason : When there is equilibrium, we have 65 – 220i = -50 + 0.25 Y or
0.25 Y = 115 – 220ior Y = 460 – 880i Substituting I = 0.10, we have Y = 460 –88 = 372
MUC.
< TOP >
15. Answer : (d)
Reason: When goverbnment bonds are purchased by the RBI through open market operations, the
money supply increases. This will reduce the rate of interest
< TOP >
16. Answer : (c)
Reason: National Income = NNP at factor cost
= NNP at market prices – Indirect taxes + Subsidies
= Rs.1,00,000 – 14,000 + 2,000 crores
= Rs.88,000 crores
Personal income = National Income – Corporate profit taxes – Retained profit
= Rs.88,000 – 6,500 – 30,000 crores
= Rs.51,500 crore
< TOP >
17. Answer : (c)
Reason : Multiplier is given by 1 / 1-MPC or 1 / MPS.Thus the multiplier in this case is 1 / 0.2 =5
< TOP >
18. Answer : (d)
Reason : \ Consumption function = 1000 + 0.80Yd
When C = Yd
Yd – 0.80 Yd = 1000
Yd = 5000
\The answer is (d).
< TOP >
19. Answer : (a)
Reason : At equilibrium, Y = C + I = C + S
Aggregate consumption function = (100 x 50) + 0.7Yd = 5000 + 0.7Yd = 5000 + 0.7(50000)
= 40000. Thus, investment (I) = Saving (S) = 50000 – 40000 = 10000.
< TOP >
20. Answer : (b)
Reason : Any policy that injects reserves into the banking system will increase the availability of credit
and reduce interest rates. Lower interest rates in turn stimulate investment, aggregate demand,
and output.
< TOP >
21. Answer : (d)
Reason : A variable is defined as a stock variable if it is measured at a point of time and as a flow
variable if it is measured over a period of time. Of all the variables listed, only inflation is
measured over a period of time and hence is a flow variable.
< TOP >
22. Answer : (c)
Reason : The balance of payments is divided into two major accounts, the current account and the
capital account.
< TOP >
23. Answer : (a)
Reason : It would be appropriate for the RBI to pursue a contractionary monetary policy during a
period of inflation. Through contractionary monetary policy RBI would like to moderate the
aggregate demand in the economy thereby causing the prices to fall. Of all the options, only
open market sale of government securities is a contractionary monetary policy. All other
options are expansionary monetary policies.
< TOP >
24. Answer : (c)
Reason : Current account captures the transactions related to trade in goods and services, transfer
payments and factor incomes. If foreign exchange out flow on account of these is more than
inflows, the current account is in deficit.
< TOP >
25. Answer : (b)
Reason : High-powered money (H) = Government money + Monetary liabilities of the Central Bank =
20,000 + 2000 = 22,000 MUC.
Money supply, Ms = H x {(1 + Cu)/(Cu + r)}
Or, 22,000 x {(1.25/0.25 + r)} = 50,000
0.55 = 0.25 + r
Or, r = 0.3.
< TOP >
26. Answer : (c)
Reason : 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
= 2000+3000+2200-1200+200
= Rs.6200billion
< TOP >
27. Answer : (d)
Reason : Y = C + I
Y = 70 +0.8Y + 90
Y = 160 + 0.8Yd
0.2Yd = 160
Y = 800 MUC
< TOP >
28. Answer : (b)
Reason : The term monetised deficit refers to the net RBI credit to the government.
< TOP >
29. Answer: (c)
Reason: The Consumer Price Index is used to capture the effect of a price increase or decrease
relative to a base year. If the consumer price index are doubled , this means that the prices in
an average consumers basket has more than doubled.
< TOP >
30. Answer : (c)
Reason : Since resources are limited and human wants are unlimited, only sacrificing one good more
of other goods can be produced
< TOP >
31. Answer : (b)
Reason : The current account balance is the trade balance (120-180 = -60) plus the net investment
income (213-260 = -47) plus net transfers received (-30). The result is Rs.137 million deficit
< TOP >
32. Answer : (d)
Reason : A business cycle is a phenomenon where economic expansion is followed by an economic
contraction
< TOP >
33. Answer: (b)
Reason: Automatic stabilizers are built- in mechanisms that helps in restoring price stability and full
employment in an economy. When the economy is in a recession, the personal tax, being an
automatic stabilizer, will automatically fall and this will reduce the revenues of the
government. This implies an increase in the budget deficit.
< TOP >
34. Answer : (b)
Reason : If a producer increases the price of a product due to increase in labor cost per unit of output,
then it is termed as Wage-push inflation.
< TOP >
35. Answer : (b)
Reason : Option (b) is classified as cost-push factor of inflation. Options (a), (c) and (d) are classified
as demand-pull factors of inflation.
< TOP >
36. Answer: (b)
Reason: According to classical economists, the economy will always tend towards full employment
due to the assumption that wages and prices are flexible. There cannot be involuntary
unemployment in the classical system since the assumption is that any unemployment is
solved by a reduction of real wages, which ensures that more workers are employed. With the
lower real wage, business firms will have an incentive to hire more workers.
< TOP >
37. Answer : (b)
Reason : The difference between a country merchandise exports and its merchandise imports is the
balance of trade.
< TOP >
38. Answer : (e)
Reason : 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 doesn’t measure economic growth.
< TOP >
39. Answer : (d)
Reason : At break-even level of disposable income, savings are zero.
\ S = –150 + 0.25Yd = 0
0.25 Yd = 150
Yd = = 600.
150
0.25
< TOP >
40. Answer : (a)
Reason : Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money = monetary
liabilities of the central bank + government money.
DMs = DH. m
m= (1+Cu) /( Cu + r)
= (1+0.2)/ (0.2+0.05)
= 4.8
When foreign exchange reserves of the country decline by Rs.250 MUC, the monetary
liabilities also fall by 250 MUC. Thus, money supply decline by 4.8 x 250 = 1200 MUC.
< TOP >
41. Answer : (d)
Reason : Real GDP for 2005 = (Quantity of bread in 2005 x Price of bread in 2004) + (Quantity of
butter in 2005 x Price of butter in 2004) = (1500 x 20) + (2500 x 15) = Rs.67500.
Nominal GDP for 2005 = (Quantity of bread in 2005 x Price of bread in 2005) + (Quantity of
butter in 2005 x Price of butter in 2005) = (1500 x 25) + (2500 x 20) = 37500 + 50000 =
87,500.
GDP deflator = = (87500/67500) x 100 = 1.296 x 100 = 129.6 or 130
approximately.
NominalGDP
×100
RealGDP
< TOP >
42. Answer : (b)
Reason : High powered money = Monetary liabilities of central bank + Government money
Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary
liabilities
Financial Assets = Credit to government + credit to banks+ credit to commercial sectors +
foreign exchange assets
= 7,840 + 2,450 + 3850 + 1050= 15190
Non-monetary liabilities = 700 + 2940 = 3640
Monetary liabilities of central bank = 15190+350 – 3640 = 11900
High powered money = 11900 + 175 = 12075 MUC.
< TOP >
43. Answer : (c)
Reason : Velocity of money = Y/MS
Y = C+ I + G +E –M
5250+1575 + 350 + 1120 + 280 – 210 =8365\ Velocity of money = 8365/ 1673 = 5.
< TOP >
44. Answer : (d)
Reason : When the money supply increases the interest rate decreases. This will increase the
investment Demand which will increase GNP. .
< TOP >
45. Answer : (d)
Reason : Technically recession is defined as decline in output for two or more consecutive quarters.
< TOP >
46. Answer : (d)
Reason : The term fiscal policy comes from the word’fisc’meaning exchequer. It is dealing with the
revenue and expenditure policies of the government to achieve full employment.
d. It is the answer.
< TOP >
47. Answer : (c)
Reason : 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
Y = 220 – 0.6Y
Y = 550
\ Budget deficit = T – G = 0.2 (550) – 70 = 110 – 70 = 40 MUC.
< TOP >
48. Answer : (c)
Reason : Wages and salaries paid by the government = Factor income received by households –
(wages and salaries paid by the business sector + Dividends paid to house holds + Factors
income receive abroad)
= 160 – 100 – 10– 20
= 30 MUC.
< TOP >
49. Answer : (c)
Reason : GNPMP = GDPFC + Indirect taxes – Subsidies + NFIA
NFIA = GNPMP – GDPFC – Indirect taxes
= 75,000 – 60,000 – 5,000
= 10,000
< TOP >
50. Answer : (b)
Reason : Multiplier = 1/1-MPC = and MPC = . The larger the marginal propensity to
consume the larger will be the multiplier. If the multiplier has a value of 3, it implies that if
investment increases by Re 1, the output will increase by Rs.3. Since the MPC will be 2/3, a
change in output of Rs.3 will result into an increase in consumption by Rs.2.
Y
I
D
D
C
Y
D
D
< TOP >
51. Answer : (e)
Reason : According to classical economicsts, money is used only as a medium of exchange and has no
value on its own. This is also called the classical dichotomy.
< TOP >
52. Answer : (a)
Reason : Intermediation Ratio = Secondary issues/New issues
Or, secondary issues = Intermediation ratio x New issues = 0.7 x 30,000 = 21,000 MUC
Total issues = New issues + Secondary issues = 30,000 + 21000 = 51,000 MUC
Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF)
= 51000 /42500 = 1.2.
< TOP >
53. Answer : (b)
Reason : Money supply = High-powered money (H) x Money multiplier
80000 = H x {(1 + 0.2)/(0.2 + 0.1)}
Or, H = 20,000 MUC
H = Monetary Liabilities of the Central Bank + Government money = ML + 1050
Or, ML = 20000 – 1050 = 18950.
Total assets = Total liabilities (= Non-ML + ML)
Total liabilities = Net worth (6000) + Government deposits (150) + Other non-monetary
liabilities (3000) + Monetary liabilities (18950) = 28100.
Thus, total assets = 28100 = (10000 + 4000 + 5000 + 100 + Net foreign exchange assets)
Or, Net foreign exchange assets = 28100 – 19100 = 9,000.
< TOP >
54. Answer : (c)
Reason : The four stages of the business cycle in a sequential form are boom, recession, depression
and recovery
< TOP >
55. Answer : (e)
Reason : In the long run, the Philips curve is vertical. Hence the inverse relation between inflation and
unemployment do not hold.
< TOP >
56. Answer : (a)
Reason : An important difference between the approaches of the classical and Keynesian economists
use to achieve a macroeconomic equilibrium is that Keynesian economists actively promote
the use of fiscal policy; the classical economists do not. Classical economists believe
intervention can be de-stabilizing and advocate laissez- faire economy. Therefore the answer
is (a).
< TOP >
57. Answer : (b)
Reason : Expansionary fiscal policy refers to increase in government spending and decrease in taxes.
< TOP >
58. Answer : (b)
Reason : Marginal Propensity to consume = = = 0.5
C
Y
D
D
0.5
1.0
< TOP >
59. Answer : (b)
Reason : The Reserve Bank of India has three tools with which it can conduct monetary policy, and to
reduce the money supply it would have to either increase reserve requirements, raise the
discount rate, or decrease the monetary base by selling government securities. This means
that answer (b) is correct because to reduce the money supply the discount rate must be
increased, not decreased.
< TOP >
60. Answer : (e)
Reason : Financial assets of the banking system consist of all those assets (loans, foreign exchange
assets) which are which are under the control of the banks, including the central banks.
(a) RBI’s credit to government is considered as a financial asset, as the government is
liable to return to the RBI and also gives a nominal return.
(b) Similarly is the case with the other bank’s credit to the government, as said above is part
of the financial asset of the banking system.
(c) Credit given to the commercial sector also gives a return to the bank hence it is part of
the financial assets of the banking system.
(d) Buildings are physical assets and not financial assets and are shown as other assets in the
balance sheet of the bank.
< TOP >
61. Answer : (b)
Reason : The major function of the Reserve Bank of India is to control the nation’s money supply, and
its goals are to keep inflation low while trying to maintain full employment and ensure stable
exchange rate. The Reserve Bank of India cannot keep a check on fiscal policy because
government can only determine fiscal policy so answer (b) is the appropriate choice.
< TOP >
62. Answer : (c)
Reason : Per capita GDP measures the GDP per head. This is the most appropriate measure of the
standard of living of a country.
< TOP >
63. Answer : (a)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C + I + G
Or, Y = 0.80Y + 120 + 1000 + 400
Or, 0.20Y = 1520
Y = 7600
S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (7600– 100)
= – 200 + 1500
= 1,300 MUC.
< TOP >
64. Answer : (b)
Reason : Because of the double entry concept underlying the recording of transactions, BoP account
must always be in balance. Thus, ‘Balance in current account + Balance in capital account +
Change in reserves = Zero’. When there is no change in the foreign exchange reserves, then
‘balance in current account + balance in capital account = zero’ (or) balance in current
account = - (balance in capital account).
a. Balance in current account + Balance in capital account = Change in reserves. When
balance in current account ‘plus’ balance in capital account is zero, then balance in the
current account = - balance in capital account. Hence, statement (a) is not correct.
b. There will no change in the foreign exchange reserves of a country only when surplus
(deficit) in current account is equal to deficit (surplus) in capital account.
c. Current account balance may or may not be zero when the change in foreign exchange
reserves of a country is zero.
d. Trade balance (exports – imports) may or may not be zero when the change in foreign
exchange reserves of a country is zero.
e. Capital account balance may or may not be zero when the change in foreign exchange
reserves of a country is zero.
< TOP >
65. Answer : (b)
Reason : Money supply = High Powered money × Money multiplier
\ 17,200 = 4,300. m
or, m =
\
or, 1+ Cu = 4Cu + 0.40
or, – 3Cu = –.0.6
or, Cu = 0.20
17, 200
4
4,300
=
1 Cu
m
Cu r
+
=
+
1 Cu
4
Cu 0.10
+
=
+
< TOP >
66. Answer : (b)
Reason : 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.
< TOP >
67. Answer : (c)
Reason : To counter the recession the fiscal and monetary policies should be expansionary.
a. Decrease in government expenditure is a contractionay fiscal policy. This measure will
worsen the recessionary situation.
b. Decrease in government expenditure is a contractionay fiscal policy. This measure will
worsen the recessionary situation.
c. Decrease in the discount rate increase money supply in the economy and is an expansionary monetary
policy. This will counter the recession by increasing the aggregate demand in the economy.
d. Decrease in money supply is a contractionay monetary policy. This measure will worsen
the recessionary situation.
e. Increase in the tax rate is a contractionay fiscal policy. This measure will worsen the
recessionary situation.
< TOP >
68. Answer : (b)
Reason : Depreciation is defined as the difference between gross investment and net
investment.
< TOP >
69. Answer : (b)
Reason : Reason : MPC = 0.6
Multiplier (m) =
DY = m . DI
\ DI = = 200
2.5
0.4
1
1 0.6
1
1 MPC
1
= =
−
=
−
2.5
500
m
Y
=
D
< TOP >
70. Answer : (c)
Reason : The quantity theory equation is given by MV = PQ.
< TOP >
71. Answer : (a)
Reason : Total money = Rs.10,000.
25% of total money which is held in the form of currency is Rs.2,500.
Demand deposit component of money supply is Rs.10,000 – Rs.2,500 =Rs.7,500
Given the reserve ratio of 12%, required reserves are 7,500 ´ 0.12 = Rs.900.
< TOP >
< TOP OF THE DOCUMENT >
72. Answer : (b)
Reason : The devaluation in the value of rupee is aimed at increasing exports. For example when the
rupee depreciates, it becomes cheaper in terms of the foreign currencies and hence imports
from India will be more attractive. In other words, our exports will become more attractive.
< TOP >
73. Answer : (b)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C + I + G
Or, Y = 0.80Y + 120 + 500 + 200
Or, 0.20Y = 820
Y = 4,100.
< TOP >
74. Answer: (c)
Reason : Inflation ={ (225–200)/200)} ×100= 12.50
< TOP >
75. Answer: (a)
Reason : Money multiplier = = = 5.75
1 Cu
Cu r
+

+
1 0.15
0.15 0.05
+

+
< TOP >
76. Answer: (c)
Reason : Disguised unemployment arises marginal productivity of labor is zero.
< TOP >