ACE INSTITUTE OF MANAGEMENT

End-Term Exam (CIE-VI)- May 3, 2020

BBA-III
SUBJECT: INTRODUCTORY MACRO-ECONOMICS
FULL MARKS: 50
Time: 10:00AM - 12:00 PM Submission Time: 12:00 PM to 12:10 PM Pass Marks: 22.5

Section “A”
Attempt all the short questions. (2x10=20)
1. What will be the impact of increase in interest rate on aggregate demand?
2. What is the relationship between money supply and value of money?
3. When does a deflationary gap occur?
4. Give an example of an autonomous consumption?
5. Why the import multiplier is called backward multiplier?
6. Why the decrease in the price of bond leads to a decrease in demand for money?
7. Give a brief effect of an imposition of higher tax on aggregate supply.
8. Does the increase in money supply raise the interest rate? Give reason.
9. Suppose C = Rs 100 + 0.80 Yd, I = Rs 70, G = 100, Tax (T) = 80. Calculate the value of tax multiplier.
10. Calculate the rate of inflation from the table.
Year CPI
2018 130.5
2019 140.8

Section “B”

Group B: Long Question (1x10 =10 marks)

11. “The extreme fluctuations of business cycle can be overcome with the help of the fiscal and monetary
policy; however it leaves some unsatisfactory outcome”. Discuss.

Or,

“The pandemic caused by Corona Virus has been wrapping an entire world and has caused around 240
thousand people death to date; it is predicted that the situation will be more vulnerable in the days to
come”.
In one hand many sectors have got to fall down and confronted highly worse off situation globally;
however it should not be said that on the other hand it has caused something thing better off. Discuss.

Section “C”
Case Analysis (20)
12. Read the situation given below and answer the questions that follow.

PROBLEMS FOR THE JAPANESE ECONOMY

The 1990’s were a troublesome time for the Japanese economy. Despite being one of the largest
economies in the world with a strong balance of payments and low inflation, the economy was in trouble
and the government was struggling to rescue it.

In the early 1990s a major banking crisis set off a chain of events which led to a situation by 1999 in
which industrial production and consumer spending had fallen continuously for two years. GDP had been
increasing on average at 0.7% per year for seven years against a previous annual trend of 3 to 4%. In 1998
the economy had contracted by 2.8%. Corporate bankruptcies were at a record high as was
unemployment.

In 1998 the government had proposed a $198 billion fiscal rescue package. Among its measure were cuts
in income tax (particularly on the higher rates), a public works programme and a proposal to issue gift
vouchers worth $165 each to 35 million consumers, mostly under 15s and the elderly. What was missing
from the package was any proposal to cut consumption tax (the Japanese sales tax) or to make any
monetary policy adjustments. With short-term interest rates around zero and the central bank reluctant to
increase the money supply in the economy, monetary policy had little to offer. The unsound banking
practices and incautious lending, which contributed to the crisis, were being tackled but only slowly.

The Japanese economy was ending the decade in a far different situation from where it started.

(a) Summerise what happened to economic growth in Japan in the 1990s. [2]

(b) How does the performance of the Japanese economy illustrate the problem of achieving all policy
targets at the same time? [3]
(c) Are zero interest rates desirable? [3]

(d) Why is incautious lending by banks bad for an economy? [3]

(e) Explain why the central bank might have been unwilling to increase the money supply in the
economy. [3]

(f) Discuss the rescue package proposed by the Japanese government. [6]

GOOD LUCK!!

NAME: HARSHEET KEDIA

BBA SECTION ‘B’
 ROLL NO: 19031153

1. What will be the impact of increase in interest rate on aggregate demand?

ANS: The impact o increase in interest rate will have effect in three different ways:

1) Import and Export: When interest rate increases the prices which the exporters offer becomes
high. Therefore, the export tends to decrease. While, in the other hand imports start to
increase which leads to negative net exports.
2) Investments: Investors will affect negatively with increase in interest rates as higher interest
rates means the major portion of the profit they gain has to be paid as interest. Investments
is inverse proportional to interest rates.
3) Consumptions - When interest rates are increased then consumers will reduce the
consumption as :
A) Their disposable income decreases: The portion of their income goes to interest and the income
which the consumer can spend becomes low.
B) The cost of production gets higher: Due to higher interest rate, the cost of production becomes
higher, which in turn makes the product expensive and hence it reduces the demand, which in
turn leads to decrease in consumption.
2. What is the relationship between money supply and value of money?

Ans: The relationship between money supply and value of money is negative or inversely
proportional. When money supply increases, the value of money decreases which in turn leads to
inflation. For example: Inflation of Zimbabwe occurred due to excessive printing of notes, i.e
excessive money supply.

3. When does a deflationary gap occur?

ANS: Deflationary gap occurs in a situation in which aggregate expenditure falls short of that required to
produce a level of national income which would ensure full employment.

4. Give an example of an autonomous consumption?

ANS: Autonomous consumption is the amount spent even when income is zero and which does not vary
with income. Foe example: A person needs to pay EMI of home or car even if the income is zero.

5. Why the import multiplier is called backward multiplier?

ANS: When import of the country increases then the net exports of the country comes to negative which
affects the foreign trade and also affects the national income which is known as backwash effect .
therefore, import multiplier is called backward multiplier.
6. . Why the decrease in the price of bond leads to a decrease in demand for money?
ANS: Decrease in the price of bond leads to decrease in demand for money as lower the price of bond,
lower the interest rates it offers and as the interest rates are low, people tend to keep money with
themselves and invest in other ways which offer higher return.
7. Give a brief effect of an imposition of higher tax on aggregate supply.

ANS: The effect of imposition of higher tax on aggregate supply is that when the businesses are imposed
higher tax it leads to increase in cost of production, which makes the goods expensive. As the goods
 become expensive and due to higher taxation, the disposable income that is left with the people is low,
aggregate demand becomes low which also leads to decrease in aggregate supply.

8. Does the increase in money supply raise the interest rate? Give reason.

ANS: No, the increase in money supply doesn’t increase the interest rates. It is opposite as, higher the
money supply, higher the people will get money in hands. And if there are no instances of extreme
inflation then, as the supply is more there will be decrease in interest rates.

9. Suppose C = Rs 100 + 0.80 Yd, I = Rs 70, G = 100, Tax (T) = 80. Calculate the value of tax multiplier.

Here,
C= 100+0.80Yd, I=70, G=100, T=80
Y=C+I+G
Y=100+0.80yd+70+100
Y=270+0.80
11. The pandemic caused by Corona Virus has been wrapping an entire world and has caused around 240
thousand people death to date; it is predicted that the situation will be more vulnerable in the days to
come”.

In one hand many sectors have got to fall down and confronted highly worse off situation globally;
however, it should not be said that on the other hand it has caused something thing better off. Discuss.

ANS: The pandemic caused by corona virus is giving a tough time both to the human life and economic
life. The health of economic center is not in a good state and measures should be taken to revive this
situation of upcoming recession.

1)Each and every economic center are getting affected due to this Pandemic. People are panic buying
which brings out shortage and deficiency of supply.

2) There are higher chances of unemployment. As due to corona pandemic many businesses are shut down
and job cuts are being done in a higher rate. Many people will suffer with unemployment which will affect
the economy.

3) Businesses working in loan will have a major hit: Businesses who take loan to work will have a major
hit because in this pandemic their source of income is shut and they still need to pay hefty loans. This will
kill small scale businesses and will affect economy in adverse way.

4) Health affect: As many people are dying due to this pandemic there will be chances that the manpower
will decrease in coming days. Businesses dependent on man power will get a major hit as due to scarcity
of manpower.

5) Starvation: People whose income is in daily basis will need to starve as the source of income is shut and
they will die eventually because of starvation which will affect economic life of the country adversely.

6) Financial Markets: Financial Markets are taking a major fall due to this pandemic. Even the oil prices
hit a major low to negative value. This is a signal of recession which will make investors think about their
choices and many businesses will suffer a huge loss because of this.

7) Increase in government spending and decrease in government reserves: Government are taking
measures to ensure the citizens are safe and sound and they are giving relief packages. These relief
packages are increasing government spending and government are spending their reserves in it. It will
now lead to decrease in GDP as decrease in government spending leads to budget deficit and the country
will have to face a hard time to revive the economy.
8) Panic buying of some sectors and zero buying of some sectors are causing imbalance in economy by
causing a unique aggregate demand and supply.

9) Financial Institutions are reluctant to provide loans to businesses as the situation of economy and
businesses are at worst and they are fearing bad debt in this situation.

10) Even financial institution is taking a major hit due to unable of businesses to pay interest and bank
needs to pay interest to the people having money in the bank.

11)After the pandemic is over the global economy will face a massive recession. Country will face
situation like 2008 recession and this time global economy will have a hard time.

12) After this pandemic is over people will not have disposable income and will only focus on the
necessary items and major auto industries, tech industries will have a major hit. Auto and tech industries
serve a major part to the economy which will in turn lead to major hit to the economy itself.

This pandemic has done no good for the economy as government spending are being done on the vaccines
and relief packages. The loan on countries itself are increasing and there is no other way to handle this
situation. Small businesses and economy are taking a major hit and the revival chances of these businesses
are very less. Manpower is being decreased and higher unemployment will lead to less disposable income
which in turn will affect the economy.