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a. Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5 years
b. Barucha invests Rs.5,000 in equity shares of a company
c. Charlie and Co. accumulates unsold inventory worth Rs.1,000
d. Delta Corp. buys ten used vehicles to strengthen its transportation fleet
e. None of the above.
< Answer
8. Which of the following is not a postulate of Say’s law? >
a. Statistically money demand function can be better determined than consumption or investment demand
b. Money is a substitute for financial assets
c. Demand for money is determined by rate of interest
d. Fiscal policy is ineffective because of ‘crowding out’ effect
e. Both (a) and (d) above.
< Answer
10. According to the school of rational expectations there is no trade off between inflation and unemployment >
because
a. People make biased forecasts about the future of the economy based on all the available information
b. People anticipate changes in money supply and accordingly adjust prices and wages
c. Wages are rigid downwards
d. Prices are rigid downwards
e. Both (c) and (d) above.
< Answer
11. Phases of business cycles in an economy are designated primarily based on the >
a. An increase in the price level b. An upward shift of the aggregate demand curve
c. An increase in the level of output d. Both (a) and (b) above
e. (a), (b) and (c) above.
< Answer
15. The net factor income earned within the domestic territory of a country must be equal to >
a. Net Domestic Product at factor cost b. Net Domestic Product at market price
c. Net National product at factor cost d. Net National Product at market price
e. Personal income.
< Answer
16. In the Union Budget, profits from public sector undertakings are taken under >
a. Both (I) and (III) above b. Both (III) and (IV) above
c. (I), (II) and (III) above d. (II), (III) and (IV) above
e. All (I), (II), (III) and (IV) above.
< Answer
18. Full employment exists when there is >
I. Marginal propensity to save will be larger. II. Multiplier value will be larger.
III. Average propensity to consume will be larger. IV. Autonomous consumption will be higher.
a. Both (I) and (II) above b. Both (II) and (III) above
c. (II), (III) and (IV) above d. (I), (II) and (III) above
e. Both (III) and (IV) above.
< Answer
29. Which of the following would not be included in GDP? >
END OF SECTION A
a. 600 MUC b. 700 MUC c. 500 MUC d. 800 MUC e. 900 MUC.
(2 marks)
< Answer
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 d. 130 MUC e. 170 MUC.
(2 marks)
< Answer
44. The following data pertains to a hypothetical economy. >
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)
< Answer
47. The following are the excerpts from the balance sheet of a Central Bank. >
Particulars MUC
Notes in circulation 100
Other deposits 50
Other non-monetary liabilities 100
Statutory and contingency reserves 420
Credit to Central Government 1,120
Shares & loans to financial institutions 550
Central bank claims on Commercial banks 350
Net foreign exchange assets 150
Other assets 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)
< Answer
48. For a hypothetical economy the following is the estimated steady state consumption function. >
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)
< Answer
49. Given the following data, compute the current account balance for the country. >
Particulars MUC
Earnings on loans and investments from abroad 500
Earnings on loans and investments to abroad 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)
< Answer
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 e. 1,120 MUC.
(1 mark)
< Answer
51. The following data pertains to a hypothetical economy. >
Particulars MUC
Private final consumption expenditure 750
Fixed capital formation 225
Increase in inventories 50
Government final consumption expenditure 160
Exports 40
Imports 30
Money supply 239
The velocity of money in the economy is
a. 4 b. 3 c. 5 d. 6 e. 7.
(2 marks)
< Answer
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 e. Rs.4,600.
(1 mark)
< Answer
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 e. 300 MUC.
(2 marks)
< Answer
54. On the basis of following data calculate finance ratio for the year 2003. >
Particulars MUC
GDP at market price 76,500
Depreciation 2,500
Indirect taxes 1,225
Subsidies 725
Net factor income from abroad 200
Net capital formation 15,500
Finance interrelation ratio 1.5
a. 28.6% b. 31.6% c. 34.6% d. 26.6% e. 36.6%.
(2 marks)
< Answer
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?
a. 2.0% b. 3.0% c. 4.0% d. 3.5% e. 4.5%.
(2 marks)
< Answer
56. The following table gives information about price and units of aggregate output for the years 2002 and 2003. >
2002 2003
Goods Quantity Price Quantity Price
(Rs.) (Rs.)
P 30 2.00 35 2.50
Q 55 6.00 65 8.00
R 45 5.00 60 6.00
S 35 4.00 40 5.00
T 40 3.00 50 4.50
What is the value of GDP deflator for the year 2003?
M + hi hi M M − hi hi − M
M+ + hi
a. Y = k b. Y = k c. Y = k d. Y = k e. Y = k .
(1 mark)
< Answer
61. Given the following information, what would be the national income of the economy? >
Particulars MUC
Compensation to employees 2,325
Interest payments made by the firms 323
Rental income received 43
Corporate profits (before tax) 170
Proprietors’ income 135
Dividends paid by the firms 72
Personal taxes paid by the individuals 260
a. 2,786 MUC b. 2,996 MUC c. 2,886 MUC d. 3,115 MUC e. 2,662 MUC.
(2 marks)
< Answer
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 e. 2,000 MUC.
(2 marks)
< Answer
63. The following information is given from the national accounts of a country for the year 2002-03. >
Particulars MUC
Factor income earned within domestic territory 65,000
Gross domestic fixed capital formation 6,000
Net domestic fixed capital formation 4,000
GNP at market prices 85,000
Indirect taxes 3,000
Subsidies 1,000 The net factor income from abroad
for the year 2002-03 is
a. 15,000 MUC b. 13,000 MUC c. 16,000 MUC d. 17,000 MUC e. 11,000 MUC.
(2 marks)
< Answer
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% e. 2.50%.
(1 mark)
< Answer
65. For an economy, goods market equilibrium is >
END OF SECTION B
Suggested Answers
Economics – II (122) : January 2004
1. Answer : (b) <
TO
Reason :Stock is a variable which is measured at a point of time. P
>
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.
2. Answer : (c) <
TO
Reason :Circular flow of income refers to money flow from households in return P
>
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.
3. Answer : (b) <
Reason :Open market operations refer to purchase and sale of securities by the TO
P
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).
4. Answer : (b) <
TO
Reason :AD curve gives the relation between quantity of goods and services P
>
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.
5. Answer : (e) <
TO
Reason :Realized output refers to aggregate supply and spending refers to P
>
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.
6. Answer : (e) <
TO
Reason :In long run the economy will tend towards output which is referred to as P
>
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.
7. Answer : (c) <
TO
Reason :Investment includes expenditure on the plant and machinery produced P
>
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.
8. Answer : (d) <
TO
Reason :According to Says Law of markets ‘supply creates its own demand’. Over P
>
production and unemployment are not possible in long run as price and
wages adjust to remove both of them. Only in short run disequilibrium can
exist.
a. True, as in short run over production & 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) <
TO
Reason :Monetarist opines that demand function for money is better determined P
>
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 : (b) <
TO
. Reason :a. School of rational expectation is based on the premise that people do P
>
not make systematic forecasting errors. On an average their views
about the future are correct and not biased as they behave rationality.
Hence the option is wrong.
b. Whenever central bank increases the money supply, according to
rational expectations theory, people realize that it is the cause of
inflation. According workers and business firms adjust wages and
prices in response to the changes in Money supply. Hence any change
in Money supply only affects wages and prices. Hence this option is
true as only wages and prices are affected and not employment.
c. Since the people are assumed to behave rationally, any attempt by the
monetary authorities to increase employment will be anticipated by
the firms. They accordingly changes prices and wages. Hence wages
are flexible and not rigid. Hence the option is not true.
d. 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. e. Since (c) and (d) are not correct options, (e) cannot be the answer.
11. Answer : (c) <
TO
Reason :The periodic upswings and down swings in the level of economic activity P
>
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.
(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) <
TO
. Reason :Cost-push inflation refers to increase in price as a result of the causes P
>
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.
<
35 Answer : (c) TO
. Reason :Since the economy is already under inflation, any increase in money P
>
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
the commercial banks from the central bank. This will increase the
money supply, hence not the correct option.
b. When the government buys securities from the people, the money
with the people will increase, the money supply will increase and
prices also will rise. Hence not the correct option.
c. The central bank by increasing the cash reserve ratio reduces the
credit creation capacity of the banking system. This results in
decrease in money supply which will compensate the increase in the
money supply due to foreign exchange inflow. Hence this option is
correct.
d. Not a correct answer it is a fiscal instrument.
e. Increasing government spending is also a fiscal policy instruments.
36 Answer : (d) <
TO
. Reason : All the transactions which effect the asset or liability position of a P
>
country are put under Capital account of the Balance of Payments
statement. Other transactions are put under the Current account.
(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 : (b) <
TO
. Reason :a. Progressive tax system refers to imposing more tax on people with P
>
greater income. As income increases, tax rate also increases. Hence
more tax is imposed on higher income people. This option is not true
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) <
TO
. Reason :Automatic stabilizers are features of the government budget that P
>
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.
39 Answer : (e) <
TO
. Reason :a. Low managerial efficiency leads decrease in productivity, this .would P
>
mean that more input (capital) is required to produce an unit of
output. Hence ICOR increases.
b. 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. 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. 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. 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.
40 Answer : (a) <
TO
. Reason :a. .by reason given above this option is true P
>
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.
41 Answer : (d) <
TO
. P
Reason :Personal Disposable Income = Personal income – personal taxes >
Ms = H × {
( 1 + Cu ) / ( C u + r ) }
48,000 = 12,000 {
( 1 + 0.25 ) / ( 0.25 + r ) }
= (1 + 0.25)/(0.25 + r) = 4
= 1 + 4r = 1 – 0.25
4r = 0.25
r = 0.0625 = 6.25%.
60 Answer : (a) <
TO
. Reason :Money market equilibrium is where demand for money = supply of P
>
money
kY– hi = M .
kY = M + hi
Y = ( M + hi) / k.
61 Answer : (b) <
TO
. Reason :National income = Compensation of employees + Proprietor’s income + P
>
Interest payments made by the firms + Corporate profits = 2,325 + 135 +
323 + 170 + 43 = 2,996.