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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2005 ICFAI University M.B.A Suggested Answers Economics (MB141) : July 2005 Question paper
Suggested Answers Economics (MB141) : July 2005
1. Answer : (d)
Reason : When the total product is at a maximum, the average product is above the marginal product though both are
falling. And the marginal product is zero
< TOP >
2. Answer : (a)
Reason: Here ENGC has effected an improvement in its technology, which means lower cost of production and
hence offers much scope for a greater amount of the product. This is definitely shown by an shift in the
supply curve to the right
Hence the correct answer is (a)
< TOP >
3. Answer : (d)
Reason : The demand for essential goods are relatively inelastic.
< TOP >
4. Answer : (c)
Reason : Ceteris peribus, when the demand for electric cars remains the same even after an increase in the price of
diesel cars, electric cars and diesel cars are said to be independent. In this case the cross elasticity of demand
will be zero. This means that the quantity demanded of one good remains constant regardless of the change
in price of the other good.
(a) Is not the answer because in case of substitute goods, if the price of one good increases (decreases) the
quantity demanded of other good also increases (decreases).
(b) Is not the answer because in case of complementary goods, if the price of one good decreases
(increases) the quantity demanded of other good also increases (decreases).
(c) Is the answer because in case of independent goods the quantity demanded of one good remains
constant regardless of the price of the other good.
(d) Is not the answer because ceteris peribus, when the demand for electric cars remains the same even
after an increase in the price of diesel cars, it cannot be inferred that electric cars and diesel cars are
luxury goods. The classification of goods like inferior, normal and luxurious goods can be done only
when the income elasticity of demand for the good is known.
(e) Is not the answer because ceteris peribus, when the demand for electric cars remains the same even
after an increase in the price of diesel cars, it cannot be inferred that electric cars and diesel cars are
inferior goods.
< TOP >
5. Answer : (b)
Reason : In the present case, we se that the price of the precious metal remained unchanged though the consumption
has increased. This means that there is an upward shift of the demand curve caused by factors other than the
price of gold.
(a) Is not the answer as the demand curve can rise only if the income of the people increases
(b) Is the answer as the shift of the demand curve can be due to an increase in income.
(c) Not the answer as there is no change income of the people
(d) Is not the answer as here the demand for gold increased due to the rise in income.
(e) Is not the answer as a decrease in the price of substitutes of the precious metal leads to a decrease in the
quantity demand of precious metals.
Hence the correct answer is (b)
< TOP >
6. Answer : (b)
Reason : When there are constant returns to scale,. As equal increment in input gives equal increment in output, the
returns to scale are constant.
Hence the correct answer is (b).
< TOP >
7. Answer : (c)
Reason : Here the price elasticity of the good implies a perfectly elastic situation. In the case of perfect price
elasticity, if a firm increases the price of the good, the quantity demanded of the good may fall to zero.
Hence (c) is the answer
< TOP >
8. Answer : (b)
Reason: Qd = 10,000 – 4P
Qs = 2,000 + 6P
Equilibrium price is determined where,
Qs = Qd
2,000 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 2,000
10P = 8,000
P = 800
If the govt. imposes a sales tax of Rs.100 per units
Qs = 2,000 + 6(P – 100)
= 2,000 + 6P – 600
= 1400 + 6P
??Equilibrium price is determined, when Qs = Qd
??1,400 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 1,400
10P = 8,600
P = 860.
< TOP >
9. Answer : (d)
Reason : The presence of close substitutes imply that the demand curve faced by a monopolistically competitive firm
is relatively elastic.
< TOP >
10. Answer : (c)
Reason : Monopoly is a market structure in which there exists a only a single seller. There are no close substitutes for
the product and there are barriers to entry in to the industry. In India, the Government of India is the only
producer of atomic energy and there are barriers to entry for the private entrepreneurs. So, atomic energy
best illustrates a monopoly.
(a) Is not the answer because agriculture is not a monopoly in India, rather it is a perfectly competitive
market.
(b) Is not the answer because automobile industry is not a monopoly in India, rather it is an oligopoly.
(c) Is the answer because atomic energy is a monopoly in India.
(d) Is not the answer because cola drinks is not a monopoly in India.
(e) Is not the answer because television industry is not a monopoly in India.
< TOP >
11. Answer : (b)
Reason : Marginal product of labor is the addition to the total production by employment of an extra unit of a variable
factor.
(a) Is not the answer because marginal product of labor is not the cost of employing labor for producing
one more unit of output.
(b) Is the answer because marginal product of labor is the change in output from using one more unit of
labor.
(c) Is not the answer because marginal product of labor is not the change in revenue from selling one more
unit of output.
(d) Is not the answer because marginal product of labor is not the change in revenue from using one more
< TOP >
unit of output.
(e) Is not the answer because none of the above is not the answer.
12. Answer : (e)
Reason : The profit of a firm refers to the difference between total revenue and total cost. Hence, to maximize the
profits, the firm should maximize the difference between total revenue and total cost. The difference
between average revenue (AR) and average cost (AC) represents the average profit of the firm. Hence
maximization of difference between average revenue and average cost also indicates profit maximization. A
firm maximizes its profit when it produces and sells an output at which marginal revenue (MR) is equal to
marginal cost (MC).
< TOP >
13. Answer : (b)
Reason : When the consumer is in equilibrium,
xy MRS
= y
x
P
P
??3 = Py
75
Py =Rs.25.
< TOP >
14. Answer : (e)
Reason : From the question, Q = 135 L 2 – 3 L 3. Output is maximum when the marginal product is zero.
270 L – 9L 2 = 0; L (270 –9L) = 0 or L =30 So the amount of labor to be employed is 30 units
Hence the correct answer is (e).
< TOP >
15. Answer : (c)
Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS) between labor (L)
and capital (K). MRTS is equal to the ratio of the marginal productivities of two factors.
a. The slope of the isocost curve represents ratio of wages (w) and interest (r).
b. The slope of the indifference curve signifies marginal rate of substitution of goods (MRS).
c. The slope of the isoquant curve signifies the marginal rate of technical substitution (MRTS) between
labor and capital.
d. The slope of the budget line represents ratio of price of good X and good Y.
e. The slope of the average cost curve only shows the rate of change in average cost curve with respect
change in output.
< TOP >
16. Answer : (a)
Reason : TP (when labor = 50 units) = 50 x 25 = 1250
TP (When labor = 52 units) = 52 x 24 = 1248
Thus, MP = (1248 – 1250)/(52 – 50) = -2/2 = -1 unit.
< TOP >
17. Answer : (b)
Reason : Tea, milk, rice and water are necessary because of their importance in daily life. Ice cream is considered to
be luxury. For luxuries the income elasticity of demand will be high.
< TOP >
18. Answer : (a)
Reason : Substituting the value of K, K = 100, into the given production function, we get
200 L0.5 (100)0.5 = 2000 L0.5
To maximize profits, the firm should hire labor until MRPL = W. Since P = MR = Rs.5, we have MRPL =
MR x MPL = 5 x 1000/L0.5
< TOP >
5000/L0.5 = 50
100 = L0.5
Or, L = 10,000.
19. Answer : (c)
Reason : Q = 145 – P
P = 145 – Q
TR = 145Q – Q2
MR = 145 – 2Q
When Q = 65,MR = 145 –2(65) = 145–130 = 15 units
< TOP >
20. Answer : (c)
Reason : TPL = 20L – L2
MPL = 20 – 2L
Marginal returns become negative, once MPL equals zero. Thus,
20 – 2L = 0
Or, L = 10.
< TOP >
21. Answer : (c)
Reason : The production function for a firm Q = 100L – 0.02L2
APL =
Q 100L 0.02L2
L L
?
?
= 100 – 0.02L.
When L = 10, APL = 100 – 0.02 (10) = 100 – 0.2 = 99.8.
< TOP >
22. Answer : (b)
Reason : Total cost when 10 units of output are produced is given by. 10 ??20 = 200
Total cost when 11 units of output are produced is given by 11?21 = 231
The marginal cost is given by 231 – 200 = 31
Hence the correct answer is (b)
< TOP >
23. Answer : (d)
Reason : LTC = Q3 – 40Q2 + 450Q
LAC =
LTC
Q = Q2 – 40Q + 450
LAC will be minimum, where
LAC 0
Q
???
?
Or,
?Q2 40Q 450 ?
0
Q
?????
?
?
or, 2Q – 40 = 0
or, 2Q = 40
or, Q =
40
20
2
?
When Q = 20, LAC = (20)2 – 40 (20) + 450
= 400 – 800 + 450
= 50.
< TOP >
24. Answer : (b) < TOP >
Reason : The average cost is given by 200/Q + 20 +4Q; Total cost is given by AC.Q or
200 +20Q +4Q 2 .The variable cost is given by 20Q +4Q 2. Variable cost when the output is 15 units is given
by 20(15) +4(15) 2 = 1200
Hence the correct answer is (b)
25. Answer : (c)
Reason : Fixed costs are the costs that remain the same whatever be the level of output. In the equation, the only term
that remains constant is Rs.300. So the fixed costs of the firm is 300.
Hence the correct answer is (c)
< TOP >
26. Answer : (c)
Reason : Average productivity = No.of units of the input used
Total productivity
< TOP >
27. Answer : (b)
Reason : The ratio of percentage change in quantity demanded to the percentage change in price is the definition for
elasticity.
< TOP >
28. Answer : (b)
Reason : In the long-run, the firm will continue in business so long as it covers total costs.
< TOP >
29. Answer : (e)
Reason : The firm will not be producing at a point below its average variable cost. The marginal cost passes through
the minimum point of the average variable cost . Since the firm will not produce below the average variable
cost, only the part of the marginal cost curve, which is above the average variable cost curve, is the supply
curve of the firm.
a. it is not the answer as the whole of the marginal cost curve of the firm is not its supply curve.
b. It is not the answer as the average coist curve of a firm is not its supply curve
c. It is not the answer as the average revenue curve and te average cost curve are equal in perfect
competition and is not the supply curve of the firm.
d. It is not the answer as the part of the marginal cost curve above the average variable cost curve is the
supply curve of the firm
e. It is the answer as the part of the marginal cost curve above the marginal cost curve is the supply curve
of the firm.
Hence the correct answer is (e)
< TOP >
30. Answer : (b)
Reason : At the equilibrium level, the price = marginal cost. i.e. 140 + 8Q =300 or 8Q = 300- 140 =160. The profit
maximising output is achieved when Q = 20.
Q =
160
20
8
?
Hence the correct answer is (b)
< TOP >
31. Answer : (d)
Reason : The total revenue = Price ??quantity.
Then it becomes 24Q.Profits = total revenue – total costs
At the output level of 5 units, the firm incurs a loss of Rs. 150.
Profits = 24Q – 200 – 4Q – 2Q2
= 20Q – 2Q2 – 200
profit at the output of 5 units =
20 (5) – 2 (5)2 – 200
< TOP >
= 100 – 50 – 200
= 50 – 200 = - 150
i.e.loss
Hence the correct answer is (d)
32. Answer : (c)
Reason : At equilibrium Qd = Qs or 19000 – 300P = 13,000 – 100 P or P = 30
In a perfectly competitive market, the firm accepts the price as given data and the price charged is Rs. 30
Hence the correct answer is (c)
< TOP >
33. Answer : (c)
Reason : The average variable cost for producing 6 units of output is equal to 78/6 = Rs.13.
< TOP >
34. Answer : (e)
Reason : When a firm is in long run equilibrium, it signifies that all firms are in equilibrium and that there is no
incentive to enter or leave the industry for any firm. All firms earn only normal profits. Hence price =
average revenue = marginal revenue = marginal cost = average cost
Hence (e) is the answer.
< TOP >
35. Answer : (b)
Reason : I. It is true that if the firm reduces the price, competitive firms also reduce the price
II. It is a false statement that if the firm increases the price, competitive firms also increase the price
III. It is a false statement that if the firm reduces the price, competitive firms do not reduce the price
IV. It is true that if the firm increases the price, competitive firms do not increase the price.
(a) Is not the answer because I above is true and II above is not true in a kinked demand curve model of
oligopoly.
(b) Is the answer because I and IV above are true in a kinked demand curve model of oligopoly.
(c) Is not the answer because II above is not true, while IVabove is true in a kinked demand curve model
of oligopoly.
(d) Is not the answer because II and IIIabove are not true in a kinked demand curve model of oligopoly.
(e) Is not the answer because only I above does not reflect the behavior of a kinked demand curve model
of oligopoly.
< TOP >
36. Answer : (e)
Reason : In an oligopoly, a price war refers to successive and continued price cuts by the competitive firms to increase
sales and revenues. A price war aims at increasing market share, but not profits.
(a) Is not the answer because a price war doesn’t mean a continuous price cuts by firms to increase
revenues and profits.
(b) Is not the answer because a price war doesn’t mean an unexpected price cut by a firm to improve its
sales volumes
(c) Is not the answer because a price war doesn’t mean a decrease in quantity supplied by the competitive
firms to raise prices in order to maximize profits.
(d) Is not the answer because a price war doesn’t mean an entry of a new firm in the industry who charges
a lower price
(e) Is the answer because a price war means a successive and continued price cuts by competitive firms
with an aim to increase market share.
< TOP >
37. Answer : (e)
Reason : Average fixed cost = average total cost – average variable cost
Or 1000 – 300 = 700
So (e) is the correct answer
< TOP >
38. Answer : (b)
Reason : A consumer can maximize total utility (TU) when
x
x
P
MU
= y
y
P
MU
= - - - - - = n
n
P
MU
. This equilibrium condition says that to maximize Total Utility,
Marginal Utility for the last rupee spent on all the goods should be equal.
(a) The consumer may not maximize Total Utility as price of all the goods may not be equal.
(b) The consumer maximize Total Utility as Marginal Utility for the last rupee spent on all goods is equal.
(c) Though elasticity of demand is same for all the goods this does not ensure maximum Total Utility as
the above condition is not satisfied.
(d) This may not maximize Total Utility as irrespective of the price paid, Total Utility of every good is
same. Further, this does not satisfy the above utility maximizing condition.
(e) Budget may not permit the consumer to reach the state of maximum Total Utility for each and every
good at which point Marginal Utility is equal to zero.
< TOP >
39. Answer : (e)
Reason : Income elasticity of demand = ey=
%changeindemand
%demandinincome
=
12
5 = 2.4.
As the value of ey is 2.4 i.e., greater than 1, it is a case of luxurious goods. Here, the % increase in the
quantity demand is greater than the % increase in income.
< TOP >
40. Answer : (c)
Reason : Revenue = Profits + Total Cost
= -10Q2 + 200Q – 200 + (200 + 10Q)
= -10Q2 + 210Q
Revenue will be maximum, when ?R/?Q = 0
?R/?Q = -20Q + 210 = 0
Or, Q = 210/20 = 10.5.
< TOP >
41. Answer : (b)
Reason : Real GDP ignores the impact of inflation where as the nominal GDP includes the impact of inflation. When
price of all goods and services increase in a year, nominal GDP will surely increase.
(a) is not the answer as increase in prices of all the goods and services only increase the inflation and real
GDP may not increase
(b) is the answer as increase in prices will increase the nominal GDP even if the real output remains the
same.
(c) is false. This can happen only if price level decreases and real output increases.
(d) is false. Real GDP falls only if real output falls.
(e) is false. Nominal GDP captures the impact of both the real output and price level.
< TOP >
42. Answer : (a)
Reason : The circular flow of income refers to the process by which payments flow from households to firms for the
raw materials provided to the firms and households in turn use these payments to acquire finished goods
from the firms.
< TOP >
43. Answer : (c)
Reason : Investment includes expenditure on the plant and machinery produced during the year, expenditure incurred
< TOP >
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.
44. Answer : (b)
Reason : Personal Income = NNP at factor cost – corporate taxes – undistributed corporate profits + transfer payments
= 6,000 – 900 – 1,500 +500
= 6,500 – 2,400
= 4,100 MUC.
< TOP >
45. Answer : (c )
Reason: NNP at market prices = GNP at market prices – depreciation
Or 85,000–(6000 –4000) = 83,000
NNP at factor cost = NNP at market prices –indirect taxes + subsidies
Or 83,000 –3000 + 1000 = 81,000
Net factor income from abroad = NNP at factor cost –factor income earned within the
domestic territory = 81,000 –65,000 = 16,000 MUC
< TOP >
46. Answer : (c)
Reason : GNP at factor cost = GNP at market prices +subsidies–indirect taxes
Or 700 +25 – 60 = 665
NNP at factor cost = GNP at factor cost – depreciation
Or 665 – 10 = 655 MUC
< TOP >
47. Answer : (e)
Reason : Y = C+I+G+NX
C = a+by
Or C = 100+0.75Y
Y = C+I+G+NX
Or, Y = 100+0.75Y+50+150+20
Or, 0.25 Y= 320
Or, Y =
320 1280
0.25
?
< TOP >
48. Answer : (a)
Reason : If MPC equal zero multiplier equal 1/1-MPC=1/1–0=1. This means that a decrease in investment leads to a
decrease in equilibrium income by the same amount.
< TOP >
49. Answer : (c)
Reason : The business cycle is defined as the variation in the economic activity with a regular pattern.
< TOP >
50. Answer : (d)
Reason : Supply of goods creates its own demand. This is according to the Says law
< TOP >
51. Answer : (a)
Reason : APC + APS = 1; 1.05+APS=1, therefore APS = 1–1.05 = – 0.05.
< TOP >
52. Answer : (e)
Reason : The value of existing houses bought in a particular period is neither included in GDP nor GNP
< TOP >
So (e) is the correct answer
53. Answer: (b)
Reason: High-powered money (H) = Monetary liabilities of Central Bank + Government money = 1300 + 200 =
1500.
< TOP >
54. Answer : (c)
Reason: MPC = change in consumption /change in disposable income = 1400/ 2000 = 0.70
< TOP >
55. Answer : (c)
Reason : Give S = -300 + 0.2Y;whe S = 800, we have 800 = -300 + 0.2Y or 1100 = 0.2Y or Y = 5,500
< TOP >
56. Answer : (c)
Reason : Multiplier = 1 / 1-MPC = 1 / 1-0.5 = 1 / 0.5 = 2
< TOP >
57. Answer : (a)
Reason : (a) Classical economists assume flexible wages in the economy. Flexibility of wages results in full
employment of labor in the economy. Hence the aggregate supply curve becomes vertical at the full
employment level. Therefore, the answer is (a).
(b) Is not the answer. If Aggregate Supply curve is horizontal, increase in the Aggregate Demand does not
exert pressure on the price level and more goods and services are supplied at the same price level. This
can happen only if there is very high level of unemployed resources in the economy. But, classical
economists assume full employment of resources.
(c) If Aggregate Supply curve is first horizontal and then vertical, it implies Aggregate Supply is perfectly
elastic until the full employment level is reached and perfectly inelastic at the full employment level of
output. Hence, (c) is not the answer.
(d) Is not the answer. Aggregate Supply curve with such a shape does not exist.
(e) Is not the answer. A positively sloped Aggregate Supply curve is not possible under the classical
assumption of perfectly flexible wages.
< TOP >
58. Answer : (a)
Reason : According to Say, ‘supply creates its own demand’. When there is perfect price-wage flexibility, the
economy would operate at its full employment level and there exists no overproduction. As there exists full
employment, the supply curve stands vertical. When price and wages are flexible, during economic
downturns both prices of the goods and wages will fall which helps in reducing the impact of lower demand
on the profits of the producer. This helps the economy to recover soon. On contrary, when the economy is in
boom, the prices and wages will increase. This leads to normal profits for the producer. During such a
situation, government interference is least demanded.
< TOP >
59. Answer : (b)
Reason : consumption function captures the relation between consumption and disposable income. Slope of savings
function indicates how responsive savings are as income changes. That is, slope of the savings function is
equal to ?S/?Y, which is nothing but Marginal Propensity to Save.
(a) Is not the answer. Average Propensity to Save is equal to S/Yd.
(b) Is the answer. Marginal Propensity to Consume is equal to ?C/?Yd.
(c) Is the answer. Marginal Propensity to Save is equal to ?S/?Yd.
(d) Is not the answer. Average Propensity to Consume is equal to C/Yd.
< TOP >
60. Answer : (d)
Reason : Keeping the supply of loanable funds at the same level increase in government borrowings increase the
demand for loanable funds and put upward pressure on the rate of interest
< TOP >
61. Answer : (c)
Reason : The balance of payments is divided into two major accounts, the current account and the capital account.
< TOP >
62. Answer : (c) < TOP >
Reason : Money supply (Ms) = High-powered money (H) {(1 + Cu)/(Cu + r)}
Where Cu = currency deposit ratio
R = cash reserve ratio.
H = Monetary liabilities (ML) + Government money
{(1 + Cu)/(Cu + r)} = Money multiplier
When the cash reserve ratio (CRR) is reduced, the money multiplier increases and hence the money supply.
a. Monetary liabilities of the Central Bank consist of currency with the public, reserves of commercial
banks and other deposits. Changes in the CRR do not affect monetary liabilities of the RBI because
decrease in reserves is offset by the increase in currency with the public. Hence, monetary liabilities
remain the same for a given change in CRR.
b. As monetary liabilities are part of high-powered money, hence changes in the CRR do not affect the
high-powered money also.
c. Money multiplier = {(1 + Cu)/(Cu + r)}. Hence decrease in the CRR increases the value of the money
multiplier.
d. Money supply in the economy increases with the cut in the CRR because of increase in the value of
money multiplier. When money supply increases, the interest rates in the economy falls, leading to
increase in consumption and investment. This results in increase in aggregate demand in the economy.
e. When money supply increases because of reduction in the CRR, the aggregate demand in the economy
increases. Higher aggregate demand leads to higher price levels in the country.
63. Answer : (c)
Reason : Loans are a form of credit, and as they can be used to purchase goods and services they are the equivalent of
money. Banks through the ‘process of credit creation’ creates the money. The process of credit creation is
done by accepting deposits and lending loans.
< TOP >
64. Answer : (c)
Reason : A variable is a stock if it is measured at a particular point of time. It is a flow variable if it is measured over a
period of time.
a. Capital stock is measured at a particular point of time, hence is a stock variable
b. Unemployment level is measured at a particular point of time, hence is a stock variable
c. Investment is measured over a period of time hence is a flow variable.
d. Price index is measured at a particular point of time, hence is a stock variable
e. Public debt is measured at a particular point of time, hence is a stock variable
< TOP >
65. Answer : (a)
Reason : It would be appropriate for the RBI to pursue a expansionary monetary policy during a period of deflation.
Through expansionary monetary policy RBI would like to increase the aggregate demand in the economy
thereby causing the prices to increase. Of all the options, only open market purchase of government
securities is an expansionary monetary policy. All other options are contractionary monetary policies.
< TOP >
66. Answer : (c)
Reason : MC is the derivative of TC
MC = 20Q + 8
When Q = 15,MC = 20(15) + 8 = 308
Hence the marginal cost at 15 units = Rs.308
< TOP >
67. Answer : (a)
Reason : The arc price elasticity of demand is given by
P(Q Q )
Q(P P )
1 2
1 2
???
???
= 20
44
1(12 8)
4(5 6) ?
?
?
???
= – 2.2 = (2.2).
< TOP >
68. Answer : (d)
Reason : If the economy is in a recession, the proponents of kenesian economics suggest an increase in government
spending and a decrease in taxes.
< TOP >
69. Answer : (c)
Reason : A restrictive fiscal policy means a decrease in government spending and/or an increase in taxes, either of
which will decrease aggregate demand and will move the government’s budget towards a surplus. Answer
(a) is the opposite of the correct answer. Since this question is from a Keynesian view, there are no effects
on aggregate supply. So answers (b) and (d) ruled out.
< TOP >
70. Answer : (c)
Reason : ‘Velocity of money’ refers to the speed at which money changes hands. The ratio of nominal GDP to the
money stock defines the income velocity of money (that is, V = GDP/M = PQ/M). Thus, the price level in
the economy will increase because of rise in velocity of money, given the money supply.
< TOP >
71. Answer : (a)
Reason : Ms = m . H
m = C r
1 C
u
u
?
?
Where, Cu is currency deposit ratio
r is reserve ratio
If banks increase r, m decrease and money supply in the economy would decrease.
< TOP >
72. Answer : (b)
Reason : Money supply = High Powered money ??Money multiplier
??17,200 = 4,300. m
or, m =
17,200
4
4,300
?
m 1 Cu
Cu r
???
?
?
1 Cu 4
Cu 0.10
???
?
or, 1+ Cu = 4Cu + 0.40
or, – 3Cu = –.06
or, Cu = 0.20
< TOP >
73. Answer : (c)
Reason : Stock of high powered money ( H) = monetary liabilities of the central bank + government money = 1,250
MUC
Current deposit ratio (Cu) = 0.20
Reserve ratio (r) = 0.05
??Money supply Ms =
1 Cu H
Cu r
???
?
=
1 0.20 1,250
0.20 0.05
???
?
= 4.8 ??1,250
= 6,000 MUC
< TOP >
74. Answer : (e)
Reason : Y = C + I + G
= 556 + 165 + 79
= 800
Money supply = 160
Velocity = Y/Money supply
Or 800 / 160 = 5.
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75. Answer : (d)
Reason : Foreign exchange by MMTC represents a credit entry in India’s Balance of Payments Statement. Options in
a,b,c and e are debit entries in India’s Balance of Payments Statement.
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76. Answer : (a)
Reason : Balance of Trade (BoT) = Merchandise imports – Merchandise exports
= 20,000 –18,000 = 2000 MUC (deficit)
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