Question Paper Economics-II (122) – January 2004 Section A : Basic Concepts (40 Marks)
1.
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This section consists of questions with serial number 1 - 40.
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Answer all questions. Each question carries one mark.
a. Gross Domestic Product d. National Income 2.
Which of the following happens when the central bank increases open market purchases?
6.
7.
8.
< Answer >
< Answer >
Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5 years Barucha invests Rs.5,000 in equity shares of a company Charlie and Co. accumulates unsold inventory worth Rs.1,000 Delta Corp. buys ten used vehicles to strengthen its transportation fleet None of the above.
Which of the following is not a postulate of Say’s law? a. b.
< Answer >
Output converges towards natural rate of output Output becomes insensitive to changes in aggregate demand Input costs play a greater role in the determination of equilibrium output Aggregate supply curve is vertical Unanticipated price changes would have adverse impact on output.
Which of the following is considered as an investment? a. b. c. d. e.
< Answer >
Lower demand increases the unemployment Higher inflation further reduces the aggregate demand Economy attains full employment level Inventory level in the economy increases Both (a) and (d) above.
Which of the following statements is not true in the long run? a. b. c. d. e.
< Answer >
b. Increase in the private transfers from abroad d. Increase in interest rates
Which of the following is likely to happen, when realized output exceeds spending? a. b. c. d. e.
< Answer >
b. Rate of inflation increases d. Aggregate demand decreases
Aggregate demand in an economy increases with the a. Decrease in income of foreigners c. Decrease in government spending e. Increase in tax rates.
5.
c. Inflation
Mr. Ramesh bought an Indian made color television for Rs.15,000 Mr. Babu bought a second hand refrigerator from his friend Rajesh Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh Mr. Sujit paid Rs.10,000 to his personal secretary towards salary Both (a) and (c) above.
a. Aggregate supply decreases c. Interest rates will increase e. Total output falls. 4.
b. Inventory of a firm e. Both (a) and (d) above.
Which of the following is a “leakage” from the circular flow of income? a. b. c. d. e.
3.
< Answer >
Which of the following is a stock variable?
Disequilibrium in the economy can exist for a while There might be temporary mismatch between aggregate demand and supply
< Answer >
c. d. e. 9.
In the short run there can be excess production and unemployment Prices and wages are sticky downwards Interest rate fluctuations bring about saving and investment equilibrium. < Answer >
Monetarists prefer monetary policy over the fiscal policy because they feel that a. b. c. d. e.
Statistically money demand function can be better determined than consumption or investment demand Money is a substitute for financial assets Demand for money is determined by rate of interest Fiscal policy is ineffective because of ‘crowding out’ effect Both (a) and (d) above.
10. According to the school of rational expectations there is no trade off between inflation and unemployment because a. b. c. d. e. 11.
People make biased forecasts about the future of the economy based on all the available information People anticipate changes in money supply and accordingly adjust prices and wages Wages are rigid downwards Prices are rigid downwards Both (c) and (d) above. < Answer >
Phases of business cycles in an economy are designated primarily based on the a. Unemployment rate d. Inventory levels
b. Price levels e. Gross investment.
c. Real GDP < Answer >
12. Monetized deficit refers to a. b. c. d. e.
Fiscal deficit minus interest payments Borrowings and other liabilities of the Central Government Increase in the net RBI credit to the Central Government Fiscal deficit minus Primary deficit RBI’s credit to the commercial banks.
13. The time between the interest rate changes and the corresponding changes in the spending decisions of the public forms a part of a. Recognition lag d. Inside lag 14.
< Answer >
b. Administrative lag e. Intermediate lag.
c. Outside lag
In the classical model, the long run effect of an increase in government spending is a. An increase in the price level c. An increase in the level of output e. (a), (b) and (c) above.
< Answer >
b. Net Domestic Product at market price d. Net National Product at market price
16. In the Union Budget, profits from public sector undertakings are taken under a. Revenue receipts c. Monetized receipts e. Fiscal deficit.
< Answer >
b. An upward shift of the aggregate demand curve d. Both (a) and (b) above
15. The net factor income earned within the domestic territory of a country must be equal to a. Net Domestic Product at factor cost c. Net National product at factor cost e. Personal income.
< Answer >
< Answer >
b. Capital receipts d. Planned expenditure < Answer >
17. Stagflation is a period of I. High inflation. III. High unemployment. a. Both (I) and (III) above
II. IV.
High growth of real GDP. High aggregate demand.
b. Both (III) and (IV) above
c. (I), (II) and (III) above e. All (I), (II), (III) and (IV) above.
d. (II), (III) and (IV) above < Answer >
18. Full employment exists when there is a. Zero unemployment c. Least demand for labor e. Both (c) and (d) above.
b. Natural rate of unemployment d. Least supply of labor
19. 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 c. Disguised unemployment e. Sectoral unemployment.
b. Cyclical unemployment d. Structural unemployment
20. The curve that depicts the relationship between the rate of change in prices and the rate of unemployment is a. Laffer curve d. LM curve
b. Phillips curve e. IS curve.
< Answer >
Lowers both nominal interest rate and aggregate demand Raises both nominal interest rate and aggregate demand Raises nominal interest rate and lowers aggregate demand Lowers nominal interest rate and raises aggregate demand Does not change either nominal interest rate or aggregate demand. < Answer >
22. Both dividends and corporate taxes are part of
I. III.
I. Corporate profits. III. Personal income.
a. Both (I) and (II) above c. Both (I) and (III) above e. (I), (II) and (IV) above.
II. IV.
National income. Personal disposable income.
b. Both (II) and (III) above d. (I), (II) and (III) above
23. Consumption demand does not depend upon the level of a. Income c. Propensity to save e. Marginal efficiency of investment. a. Average propensity to save c. Marginal propensity to consume e. Level of consumption in the economy.
< Answer >
b. Propensity to consume d. Wealth < Answer >
24. The slope of the consumption curve connotes b. Average propensity to consume d. Marginal propensity to save
< Answer >
25. Bank rate means a. b. c. d. e.
< Answer >
c. Aggregate supply curve
21. Other things being equal, an increase in the supply of money a. b. c. d. e.
< Answer >
The rate of interest on inter-bank loans The rate of interest charged by banks on borrowers The rate of interest paid by banks to depositors The rate of interest charged by banks for loans given to the central bank of the country The rate of interest charged by the central bank of a country on its loans to other commercial banks.
26. Which of the following indices necessarily gives higher weights to services like doctor fees, railway and bus fares? a. Consumer Price Index (CPI) c. Index of Industrial Production e. GDP deflator.
b. Wholesale Price Index (WPI) d. GNP deflator
< Answer >
27. Which is the best indicator of economic development of a developing country like India? a. National income deflator c. Real national income e. GDP deflator.
b. GNP at current prices d. Per capita real national income
28. Given that the marginal propensity to consume is larger, which of the following statements are true. I. Marginal propensity to save will be larger. II. III. Average propensity to consume will be larger. a. Both (I) and (II) above c. (II), (III) and (IV) above e. Both (III) and (IV) above.
b. Both (II) and (III) above d. (I), (II) and (III) above < Answer >
Bobby purchases a new suit to wear at work Amok purchases a new Ford car Community Bank purchases new computers for its loan office Margaret grows tomatoes in her home garden Ford India produces but could not sell 100 cars.
30. 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? a. IS curve shifts to the left c. IS curve shifts to the right e. Both IS and LM curves shifts to the right. I. Interest rates fall. III. Portfolio disequilibrium. a. (I), (II), (III), (IV) c. (II), (III), (IV), (I)
IV.
< Answer >
b. LM curve shifts to the left d. LM curve shifts to the right
31. What would be the sequence of events when RBI increases money supply by reducing CRR?
< Answer >
II. Increase in investment expenditure. Increase in price of financial assets.
b. (III), (IV), (I), (II) d. (IV), (III), (II), (I)
e. (III), (IV), (II), (I).
32. Aggregate supply curve becomes vertical even in short run, if a. b. c. d. e.
< Answer >
Multiplier value will be larger. IV. Autonomous consumption will be higher.
29. Which of the following would not be included in GDP? a. b. c. d. e.
< Answer >
< Answer >
The economy is facing deficit demand There are idle resources All available resources are fully employed The economy is yet to reach full employment All firms are earnings normal profits.
33. All entries in the balance of payments statement should collectively sum to a. GDP of the country c. Foreign exchange reserves of the country e. Exports of the country.
< Answer >
b. GNP of the country d. Zero < Answer >
34. 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. 35. If an economy is already under inflation, and there is increasing inflow of foreign exchange, the central bank can sterilize the impact by a. Decreasing discount rate
b. Buying government securities from banks
< Answer >
c. Increasing cash reserve ratio e. Increasing government spending.
d. Increasing tax rates
36. Which of the following transactions is included in the current account balance of the Balance of payments statement? a. Foreign direct investments c. External commercial borrowings e. External assistance.
b. Portfolio investments d. Dividends earned on portfolio investments
37. Under which of the following tax system, more tax is imposed on the lower income groups? a. Progressive d. Customs
b. Regressive e. Value Added Tax.
b. Lagging indicators d. Real factors
< Answer >
b. Complicated production procedures d. Inadequate delegation of powers < Answer >
40. Recessionary GDP gap signifies a. b. c. d. e.
< Answer >
e. Growth variables.
39. Which of the following can lead to decrease in Incremental Capital Output Ratio (ICOR)? a. Low managerial efficiency c. Existing capital is less productive e. Improvement in productivity of labor.
< Answer >
c. Proportional
38. 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 c. National income aggregates
< Answer >
Higher potential real GDP compared to realized real GDP Hyper inflationary situation Deflationary situation with high unemployment Existence of natural rate of unemployment Both (b) and (d) above. END OF SECTION A
Section B : Problems (60 Marks)
41.
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This section consists of questions with serial number 41 - 76. Answer all questions.
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Marks are indicated against each question.
The following information pertains to national income aggregates of a hypothetical economy:
< Answer >
Particulars Compensation to employees paid by the Government Profit distributed as dividends by the firms Old age pension, scholarships etc. distributed by Government Purchases made by the government sector Indirect taxes paid by the firms Value of exports Factor income paid as dividends abroad Corporate tax Personal Savings Undistributed profits of the firms Income tax Factor incomes received by the household sector Personal Disposable Income in the economy is a. Rs.509 crore
b. Rs.539 crore
c. Rs.529 crore
Rs. in crore 50 70 21 246 75 22 25 62 22 42 94 632 The d. Rs.559 crore
e. Rs.549 crore. (2 marks) < Answer >
42. The following data pertains to national income aggregates of a hypothetical economy: Consumption function (C) Investment (I) Government spending (G) Taxes (T)
= 200 + 0.80Yd, where Yd is disposable income = 500 MUC = 200 MUC = 100 MUC
The equilibrium level of savings is a. 600 MUC
b. 700 MUC
c. 500 MUC
d. 800 MUC
e. 900 MUC. (2 marks)
43.
In a two-sector economy, the savings function is estimated to be S = –20 + 0.30Y d. If the equilibrium output is 600, the level of investment in the economy is a. 140 MUC
b. 150 MUC
c. 160 MUC
< Answer >
d. 130 MUC e. 170 MUC. (2 marks)
44.
< Answer >
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)
45.
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%
< Answer >
d. 5.0% e. 12.5%. (1 mark)
46.
The following equations are given with respect to a hypothetical economy.
< Answer >
Consumption function Investment function Exogenous Government expenditure Transaction demand for money Speculative demand for money Supply of Money Exports Tax function Import function
C I G Mt Ma Ms E T M
15 + 0.8 Yd 450 – 12i 300 MUC 0.20Y 145 – 60i 300 MUC 225 MUC 0.25Y 5 + 0.2Y The
equilibrium
interest rate in the economy is a. 2.7 %
b. 7.2 %
c. 5.1 %
d. 5.8 %
e. 4.5 %. (3 marks)
47.
< Answer >
The following are the excerpts from the balance sheet of a Central Bank. Particulars Notes in circulation Other deposits Other non-monetary liabilities Statutory and contingency reserves Credit to Central Government Shares & loans to financial institutions Central bank claims on Commercial banks Net foreign exchange assets Other assets
MUC 100 50 100 420 1,120 550 350 150 50
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. (2 marks)
48.
< Answer >
For a hypothetical economy the following is the estimated steady state consumption function. Ct = 10 + 0.5Yd t + 0.4C t–1 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. (2 marks)
49.
Given the following data, compute the current account balance for the country.
< Answer >
Particulars Earnings on loans and investments from abroad Earnings on loans and investments to abroad
MUC 500 2,500
Import of services
4,000
Private remittances to abroad (transfers)
500
Private remittances from abroad (transfers)
500
Exports of services
2,000
Merchandize exports
15,000
Merchandize imports
12,000
a. 1,000 MUC (Surplus) b. 1,000 MUC (Deficit) c. 500 MUC (Deficit) d. 500 MUC (Surplus) e. Zero. (2 marks) 50.
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 a. 1,060 MUC
b. 1,040 MUC
c. 1,080 MUC
d. 1,100 MUC
< Answer >
e. 1,120 MUC. (1 mark)
51.
< Answer >
The following data pertains to a hypothetical economy. Particulars Private final consumption expenditure Fixed capital formation Increase in inventories Government final consumption expenditure Exports Imports Money supply The velocity of money in the economy is a. 4
b. 3
MUC 750 225 50 160 40 30 239
c. 5
d. 6
e. 7. (2 marks)
52.
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
< Answer >
e. Rs.4,600. (1 mark)
53.
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
< Answer >
e. 300 MUC. (2 marks)
54.
On the basis of following data calculate finance ratio for the year 2003.
< Answer >
Particulars GDP at market price Depreciation
MUC 76,500 2,500
Indirect taxes
1,225
Subsidies
725
Net factor income from abroad
200
Net capital formation
15,500
Finance interrelation ratio a. 28.6%
1.5
b. 31.6%
c. 34.6%
d. 26.6%
e. 36.6%. (2 marks)
55.
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?
< Answer >
a. 2.0% b. 3.0% c. 4.0% d. 3.5% e. 4.5%. (2 marks) 56.
The following table gives information about price and units of aggregate output for the years 2002 and 2003. Goods
2002 Quantity
P
30
Price (Rs.) 2.00
Q
55
R
2003 Quantity 35
Price (Rs.) 2.50
6.00
65
8.00
45
5.00
60
6.00
S
35
4.00
40
5.00
T
40
3.00
50
4.50
< Answer >
What is the value of GDP deflator for the year 2003? a. 122 b. 104 57.
c. 151
d. 142
(3 marks) 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)
58.
b. 75 MUC
c. 20 MUC
d.125 MUC
b. 8.10%
c. 9.10%
d. 5.00%
< Answer >
e.150 MUC.
(1 mark) The central bank’s 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%
< Answer >
e. Zero.
(1 mark) 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
59.
e. 130.
e. 4.25%. (2 marks)
< Answer >
60.
< Answer >
If the demand for money is L = kY– hi and the money supply is M , the money market equilibrium is
M + hi k a. Y =
b. Y =
M+
hi k
M M − hi hi − M + hi k k . c. Y = k d. Y = e. Y = (1 mark)
61.
< Answer >
Given the following information, what would be the national income of the economy? Particulars Compensation to employees Interest payments made by the firms Rental income received Corporate profits (before tax) Proprietors’ income Dividends paid by the firms Personal taxes paid by the individuals a. 2,786 MUC b. 2,996 MUC
MUC 2,325 323 43 170 135 72 260 c. 2,886 MUC d. 3,115 MUC
e. 2,662 MUC. (2 marks)
62.
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
< Answer >
e. 2,000 MUC. (2 marks)
63.
The following information is given from the national accounts of a country for the year Particulars Factor income earned within domestic territory Gross domestic fixed capital formation Net domestic fixed capital formation GNP at market prices Indirect taxes Subsidies for the year 2002-03 is a. 15,000 MUC
b. 13,000 MUC
< Answer >
2002-03.
MUC 65,000 6,000 4,000 85,000 3,000 1,000 The net factor income from abroad c. 16,000 MUC
d. 17,000 MUC
e. 11,000 MUC. (2 marks)
64.
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%
< Answer >
e. 2.50%. (1 mark)
65.
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 a. Decrease by 25 MUC b. Increase by 25 MUC c. Decrease by 50 MUC d. Increase by 50 MUC
< Answer >
e. Insufficient data. (1 mark) 66.
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
< Answer >
e. 2,500 MUC. (1 mark)
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
< Answer >
e. 600 MUC. (2 marks)
68.
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? a. 250 MUC
b. 375 MUC
c. 190 MUC
d. 500 MUC
< Answer >
e. 225 MUC. (1 mark)
69.
The LM function is Y = 500 + 20i. Which of the following combinations of interest and income does not represent equilibrium in the money market?
< Answer >
a. i = 3% 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 mark) 70.
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 a. 2 b. 3 c. 4 d. 5 e. 6.
< Answer >
(1 mark) 71.
Transaction demand for money (Mt) Speculative demand for money (Ms) Investment function (I) Supply of money (Ms) Current equilibrium rate of interest Tax rate
< Answer >
: 0.50Y : 350 – 100i : 200 – 10i : 500 MUC : 8% : 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. (2 marks)
72.
The following information is extracted from the Union Budget for the year 2003-04:
< Answer >
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 Deficit for the year 2003-04 is a. Rs.2,53,935 cr. e. Rs.1,02,932 cr. 73.
b. Rs.1,12,292 cr.
2003-2004 Budget Estimates (in Rs. crore) 1,84,169 69,766 18,023 13,200 1,53,637
c. Rs.1,53,637 cr.
1,66,161 28,437 76,843 44,131 30,414
The
Revenue
d. Rs.4,38,795 cr.
(3 marks) 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% c. Increases from 6.2% to 6.4% e. None of the above.
< Answer >
b. Increases from 6.1% to 6.5% d. Increases from 6.0 % to 6.4% (2 marks)
74.
< Answer >
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
75.
b. 500 MUC
c. 1,000 MUC
d. 2,000 MUC
e. 10,000 MUC.
(1 mark) 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
< Answer >
d. Rs.5,000
e. None of the above. (1 mark) 76.
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. (1 mark)
END OF SECTION B
< Answer >
Suggested Answers Economics – II (122) : January 2004 1.
Answer : (b) Reason :Stock is a variable which is measured at a point of time. a. GDP is the money value of goods and services produced within the domestic territory of a country (which includes depreciation) in a year and hence not a stock because it is measured over a period of time, usually a year. b. Inventories refer to the unsold stock or the raw materials maintained by a firm to be use in the production process. Hence it is measured at a point of time, i.e., number of unsold goods as on 31 March, 2003 are 100. Hence, it is a stock variable c. Inflation refers to persistent increase in prices over a period of time. It is measured over a period of time hence it is a flow and not a stock variable. d. National Income is the sum of factor income and labour income earned by the residents of a country earned usually over a period of one year. Hence it is also a flow concept. e. Since (a) and (d) are not correct options, (e) cannot be the right answer.
< TO P >
2.
Answer : (c) Reason :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.
< TO P >
3.
Answer :
(b)
<
4.
Reason :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. a. 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. 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).
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Answer : (b) Reason :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 iii. Government policy iv. 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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5.
Answer : (e) Reason :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. a. 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. e. Since (a) and (d) are true. Hence option (e) is correct.
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6.
Answer : (e) Reason :In long run the economy will tend towards output which is referred to as natural rate of output. a. True, because long equilibrium is characterized by tendency towards natural rate of output b. In long run output of an economy does not depend on the price level, but on labour, import cost, capital stock, technological progress etc. hence true. 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 doesn’t have any impact of output in long run, unanticipated price also has no role. Hence this option is not true.
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7.
Answer : (c) Reason :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.
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8.
Answer : (d) Reason :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
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exist. a. True, as in short run over production & 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. 9.
Answer : (e) Reason :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. Above reasons shows that option a is true b. Not true, as this is also a Keynesian proposition c. Not true, as it is Keynesian economics which says so and hence demand for money is determined by interest rate. d. ‘Crowding out’ is one of the importance reasons for ineffectiveness of fiscal policy and hence true. e. Since, (a) and (d) are true, this is the correct option.
10 Answer : . Reason :a.
b.
c.
d.
e.
(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. 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. 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. d. Business men anticipate the changes in Money supply (which is the primary cause for inflation) and I as they are rational, change prices accordingly. The price are flexible and not rigid. Hence the option is not true. e. Since (c) and (d) are not correct options, (e) cannot be the answer.
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11. Answer : (c) Reason :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. a. a. 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. 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. 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. 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. 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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12 Answer : (c) . Reason : Monetized deficit refers to increase in net RBI credit to the Central Government,
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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) (a) Is not the answer because monetized deficit doesn’t refer fiscal deficit minus interest payments (b) (b) Is not the answer because monetized deficit doesn’t refer borrowings and other liabilities of the Central Government (c) (c) Is the answer because monetized deficit refers Increase in the net RBI credit to the Central Government (d) (d) Is not the answer because monetized deficit doesn’t refer fiscal deficit minus Primary deficit (e) (e) Is not the answer because monetized deficit doesn’t refer RBI’s credit to the commercial banks. 13 Answer : (c) . Reason :The lags that are given below basically refers to lags in the monetary policy a. a. Recognition lag refers to the time gap between the requirement of
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b.
c.
d.
e.
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. 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 a s 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.
14 Answer : (b) . Reason : 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.
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(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
(d) Is not the answer because both (a) and (b) above cannot be the answer.
(e) Is not the answer because (a), (b) and (c) above cannot be the answer. 15 Answer : (a) . Reason :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. 16 Answer :
(a)
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.
Reason :Government gets its revenue from two sources, i.e. tax revenue and nontax revenue. Non-tax revenue. Non-tax revenue includes profits from public sector units, interest earned on loans etc. a. a. 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. 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. c. Monetized receipts. d. 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.
17 Answer : (c) . Reason :Stagflation refers to a situation where there is high unemployment and high inflation occurs simultaneously. 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. a. a. Since statement II is false, this is not correct option b. b. Since statement II, IV are false, this is not the correct option. c. c. As statement I and III are true and hence this option is correct. d. d. As II and IV are false, hence (e) is not the correct option.
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18 Answer : . Reason : a.
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b.
(b) a. Zero unemployment refers to situation where there is no unemployment 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
c.
d. e.
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.
19 Answer : (c) . Reason : a. a. 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. 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. c. Disguised unemployment occurs due to excess labour force depending on agriculture sector. Some labourers are employed, but their contribution to production is zero. Hence the correct option. d. 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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20 Answer : (b) . Reason :a. The Laffer curve gives the relationship between tax revenues and tax rates. Hence not correct option. b. b. On the basis of definition given in the reason, this is the correct option. c. c. Aggregate supply curve gives the relationship between net national product that would be supplied at general price level given constant expectations. d. 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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21 Answer : (d) . Reason :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
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AD. a. b. c. d.
e.
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 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 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 Is the answer because other things being equal, an increase in the supply of money lowers nominal interest rate and raises aggregate demand
Is not the answer because other things being equal, an increase in the supply of money do change nominal interest rate or aggregate demand.
22 Answer : (a) . Reason : 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. a. a. 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. b. b. Dividends and corporate taxes are not part of personal income, hence not the correct option. c. c. 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.
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23 Answer : . Reason :a.
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(e) Consumption depends on the income and as income increase consumption also increase. b. b. Propensity to consume refers to the changes in consumption as a result of change in income. Hence propensity to consume effects consumption. c. c. 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 wealth
e. Consumption demand does not depend upon the level of marginal efficiency of investment.
24 Answer : (c) . Reason :Consumption curve depicts the relationship between consumption and income. a. a. 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 b. b. 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. c. c. 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. d. d. 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. e. e. 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.
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25 Answer : (e) . Reason :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. Hence by definition option (e) is correct. (a) (a) Is not the answer because bank rate doesn’t mean the rate of interest on inter-bank loans (b) (b) Is not the answer because bank rate doesn’t mean the rate of interest charged by banks on borrowers (c) (c) Is not the answer because bank rate doesn’t mean the rate of interest paid by banks to depositors (d) (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) (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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26 Answer : (a) . Reason :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
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b.
c.
d.
e.
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. 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. 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. 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. Same reason as given in option (d).
27 Answer : (d) . Reason :Economic developed 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. a. 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 Capital 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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28 Answer : (c) . Reason :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. Statement (I) is false because as MPC is larger, MPS will be smaller as it is nothing but 1-MPC. Statement (II) is true because multiplier is reciprocal of MPS and MPS is smaller as said above. 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.
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29 Answer : (d) . Reason :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 a. a. Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is part of GDP b. b. Purchase of new Ford car also refers to consumption expenditure and hence part of GDP c. c. 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 d. d. 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. e. e. Fort 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.
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30 Answer : (d) . Reason :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.
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a. b.
c. d. e.
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. 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. There will be increase in the real balances as income increases, but no shift in the IS curve. As per the reason given in the option (b), the LM curve shifts to the right and hence option d is the correct answer. 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.
31 Answer : (b) . Reason :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. 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. The correct sequence is given by option (b).
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32 Answer : (c) . Reason :Aggregate supply curve gives the relationship between net national product that would be supplied at each general price level. a. a. Deficit demand refers to s 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. b. b. 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 c. c. 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. d. d. Aggregate supply curve is vertical in short run as the resources are fully employed. Labour is a variable factor in short run, hence the available labour force is fully employed. e. e. Vertical supply curve only means that all the available resources are fully employed, it is not necessary that all firms must earn normal
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profits. 33 Answer : (d) . Reason : 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.
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(a) (a) Is not the answer because all entries in the balance of payments statement is not collectively sum to GDP of the country. (b) (b) Is not the answer because all entries in the balance of payments statement is not collectively sum to GNP of the country (c) (c) Is not the answer because all entries in the balance of payments statement is not collectively sum to Foreign exchange reserves of the country (d) (d) Is the answer because all entries in the balance of payments statement is collectively sum to zero. (e) Is not the answer because all entries in the balance of payments statement is not collectively sum to Exports of the country. 34 Answer : (c) . Reason :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. a. 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.
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35 Answer : (c) . Reason :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. A decrease in discount rate would result in increased borrowings by
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b.
c.
d. e. 36 Answer : . Reason :
the commercial banks from the central bank. This will increase the money supply, hence not the correct option. 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. 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. Not a correct answer it is a fiscal instrument. Increasing government spending is also a fiscal policy instruments. (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.
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(a) (a) Is not the answer. Foreign Direct Investment increase the liability of a country, hence falls under Capital account. (b) (b) Is not the answer. Portfolio Investments increase the liability of a country, hence falls under Capital account. (c) (c) Is not the answer. External Commercial Borrowings increase the liability of a country, hence falls under Capital account. (d) (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. (e) Is not the answer. External Assistance increases the liability of a country, hence falls under Capital account. 37 Answer : . Reason :a.
(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
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b. d. 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 refered to under the is with respect to the direct tax i.e. , income tax. Hence cannot be correct answer. 38 Answer :
(a)
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Reason :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.
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(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. b. 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. c. Since the existing capital is less productive, it means the returns on the capital are also low and hence ICOR will be high d. 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 e. As the productivity of labour increase, less units of input will be required to produce one unit of output. Hence ICOR will decrease Hence this option is correct.
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40 Answer : (a) . Reason :a. .by reason given above this option is true b. 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. 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. d. National rate of unemployment occurs when potential GDP is equal to realized GDP. Which is not the case when there is necessionary GDP gap. Hence not the correct option . e. Since (b) and (d) are not correct, this is not correct option.
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41 Answer : .
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39 Answer : . Reason :a.
b.
c. d.
e.
(d)
Reason :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. 42 Answer : . Reason :C + 120.
=
(a) 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y
Y
=
C+I+G
>
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Or, Y = 0.80Y + 120 + 500 + 200 Or, 0.20Y = 820 Y = 4,100. S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (4100– 100) = – 200 + 800 = 600 MUC.
43 Answer : . Reason :Savings function S = –20 + 0.30Yd ∴C = 20 + 0.70Yd At Y=600, S = –20 + 0.30(600) = – 20 + 180 = 160 MUC.
(c)
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44 Answer : . Reason : Y = C + I+ G
(c)
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45 Answer : . Reason :At equilibrium, S = I – 50 + 0.3Y = 150 – 5i Or, – 50 + 0.3(500) = 150 – 5i Or, – 50 + 150 = 150 – 5i Or, 5i = 50 Or, i = 10%.
(c)
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46 Answer :
(a)
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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.
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Reason :Equilibrium rate of interest is determined where IS = LM Y = C + I +G +E – M 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 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 ∴1,641.67 – 20i = 775 + 300i 320i = 866.67 i = 2.7% .
47 Answer : (c) . 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 government + credit to commercial sectors + foreign exchange assets = 1,120 + 350 + 550 + 150 + 50 = 2,220 Non-monetary liabilities = 100 + 420 = 520 Monetary liabilities of central bank = 2,170 – 470 = 1,700 High powered money = 1,700 + 25 = 1,725 MUC.
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48 Answer : . Reason : Ct = 10 + 0.5Yd t + 0.4C t–1
(c)
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49 Answer : (b) . Reason :Current account balance = Credit (Current account )– debit (Current account)
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In steady state Ct = C t–1 ∴Ct = 10 + 0.5Yd t + 0.4C t Ct – 0.4C t = 10 + 0.5Yd t 0.6 Ct = 10 + 0.5Yd t Ct = 1/6 [10 + 0.5Yd t] When Yd increases from 400 to 500, Ct = 1/6 [10 + 0.5 (400)] – 1/6 [10 + 0.5Yd t ] = 1/6 (210) – 1/6 (500) = 350 – 433.33 = – 83.33 ∴ Change in steady state consumption = 83.33 MUC.
= [Earnings on loans and investments from abroad + Private remittances from abroad (transfers) + Exports of services + Merchandize exports] – [Earnings on loans and investments to abroad + Private remittances to abroad (transfers) + Import of services + Merchandize imports] = [500 + 500 + 2,000 + 15,00] – [2,500 + 500 + 4,000 + 12,000] = 18,000 – 19,000 = –1,000 i.e. 1,000 MUC (Deficit) 50 Answer : . Reason :Demand for money is estimated to be L = 0.25Y – 10i. At i= 6 %, L = 0.25Y – 60. At equilibrium demand for money = Supply of money ∴ 0.25Y – 60 = 200 0.25Y= 260 Y = 1,040 MUC.
(b)
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51 Answer : . Reason :Velocity of money = Y/MS
(c)
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52 Answer : (b) . Reason : Disposable income = Personal income – personal Taxes = 5,000 – 200 = 4,800 MUC.
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53 Answer : . Reason :S = –50 + 0.25Y M= 0.15Y MPS = 0.25 MPI = 0.15 Multiplier = 1/(MPS + MPI) = 1/(0.25 + 0.15) = 1/0.4 = 2.5 Increase in government expenditure = 500/2.5 = 200 MUC.
(c)
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54 Answer : . Reason :Finance ratio = Total issues/National income × 100
(b)
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Y = C+ I + G +E –M
= 750 + 275 + 160 + 40 – 30=1,195 ∴ Velocity of money = 1,195 / 239 = 5.
Total Issues = Financial Interrelation ratio × net capital formation = 1.5 × 15,500 = 23,250 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 = 31.5. 55 Answer : (b) . Reason :Possible GDP growth = Possible level of investment/capital – output ratio = 25/5 = 5 % Possible per capita GDP growth = 5 – 2 =3%
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56 Answer : . Reason : GDP deflator = Nominal GNP/Real GNP Nominal GNP = 35 × 2 = 70
(e)
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57 Answer : (c) . Reason : Capital inflows – capital outflows = 6,300 – 4,500 = 1,800 MUC (Deficit).
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58 Answer : (c) . Reason :The change in government spending if the government is committed to a balanced budget to bring output to the full-employment level is 700 – 600 = 100 MUC. The multiplier is 1/ mps = 1/0.2 = 5 Change in government spending = 100 / 5 = 20 MUC.
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59 Answer : (a) . Reason :High powered money = monetary liabilities + government money = 10,500 + 1,500 = 12,000
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65 × 6
=
390
60 × 5
=
300
40 × 4
=
160
50 × 3 = 150. Real GNP = 70 +390 + 300+160 + 150 = 1,070 35 × 2.5 = 87.5 65 × 8
=
520
60 × 6
=
360
40 × 5
=
200
50 × 4.50 = Nominal GNP GDP deflator
Ms = H × {
225 = 87.5 + 520 + 300 + 160 + 150 = 1,392.5 = 1,392.5/ 1,070 = 130.14 = 130.
( 1 + Cu ) / ( C u + r ) }
48,000 = 12,000 { = (1 + 0.25)/(0.25 + r) = 4 = 1 + 4r = 1 – 0.25 4r = 0.25 r = 0.0625 = 6.25%.
( 1 + 0.25 ) / ( 0.25 + r ) }
60 Answer : (a) . Reason :Money market equilibrium is where demand for money = supply of money
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kY– hi = M . kY = M + hi Y = ( M + hi) / k. 61 Answer : (b) . Reason :National income = Compensation of employees + Proprietor’s income + Interest payments made by the firms + Corporate profits = 2,325 + 135 + 323 + 170 + 43 = 2,996.
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62 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.
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63 Answer : (c) . Reason :NNP at market price = GNP at market prices – Depreciation = 85,000 – (6,000 – 4,000) = 83,000 NNP at factor cost = NNP at market prices – Indirect taxes + subsidies = 83,000 – 3,000 + 1,000 = 81,000 Net factor income from abroad = 81,000 – 65,000 = 16,000 MUC.
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64 Answer : (b) . Reason :Growth rate of Real income = Nominal income – price level = 6% – 4% = 2%.
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65 Answer : (d) . Reason :0.5Y = 3,125 – 25i
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Y = 6,250 – 50i If i decrease by one percentage point, equilibrium income would increase by 50 MUC. 66 Answer : .
(d)
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Reason :Domestic savings = Private savings = ∴ The answer is (d)
Private savings + Public savings 1500 – (–500) = 2000 MUC.
67 Answer : (b) . Reason :Investment in period ‘t’ = 0.75 × Desired investment in period ‘t’ Desired investment in period ‘t’ = Acceleration coefficient × Change in income = 2 × 200 = 400
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∴ Investment in period ‘t’ = 0.75 × 400 = 300 MUC. ∴ The answer is (b). 68 Answer : (d) . Reason :Crowding-out refers to decrease in private investment because of increase in interest rate caused by the increase government spending. Crowding out = 100 × 5 = 500.
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69 Answer : (a) . Reason :LM function Y = 500 + 20i If, i = 10%, Y = 500 + (20 × 10)
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= 700
i = 7%, Y = 500 + (20 × 7)
= 640
i = 5%, Y = 500 + (20 × 5)
= 600
i = 4%, Y = 500 + (20 × 4)
= 580
i = 3%, Y = 500 + (20 × 3) = 560 (a) Does not fall on the LM curve hence does not represent an equilibrium in the money market. 70 Answer : (a) . Reason :Multiplier = 1/(1 – MPC + MPC × tax rate + MPI) = 1/(1 – 0.75 + 0.75 × 0.2 + 0.10) = 2.
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71 Answer : (c) . Reason : There will not be any crowding out if i = 8% This can happen only when IS function shifts to the left Substituting i = 8%, IS function becomes Y = 2,900 – 100 (8) = 2,100 Total demand for money function = (Mt /p) + (Ms /p) = 0.50Y + 350 – 100i 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.
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72 Answer : (b) . Reason : Revenue Deficit = Revenue expenditure – Revenue taxes
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Revenue expenditure = Revenue receipts Interest payment = = Non-plan expenditure Revenue expenditure = Revenue receipts ∴Revenue Deficit crore.
Non-plan expenditure + Plan Expenditure = Tax revenue + Non-tax revenue Fiscal deficit – primary deficit 1,53,637 – 30,414 = 1,23,223 = 1,66,161 + 1,23,223 = 2,89,384 2,89,384 + 76,843 = 3,66,227 = 1,84,169 + 69,766 = 2,53,935. = 3,66,227 – 2,53,935 = Rs.1,12,292
73 Answer : (c) . Reason :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.
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74 Answer : (e) . Reason :Md = 500 + 0.2Y – 20i At equilibrium Ms = Md. ∴ 2,340 = 500 + 0.2Y – (20 ´ 8) 0.2Y = 2,340 – 500 + 160 = 2,000 Y = 10,000 MUC. Therefore the answer is (e). 75 Answer : (a) . Reason :Total money = Rs.5,000. 50% of total money which is held in the form of currency is Rs.2,500.
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Demand deposit component of money supply is Rs.2,500. Given the reserve ratio of 10%, required reserves are 2,500 ´ 0.10 = Rs.250. 76 Answer : (a) Reason : 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. < TOP OF THE DOCUMENT >
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