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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2006 ICFAI University M.B.A Suggested Answers Economics (MB141) : January 2006 Question paper
Suggested Answers Economics (MB141) : January 2006
1. Answer : (d)
Reason : An economy that relies on both markets and command
mechanism is called a mixed economy. Government as well
as business firm provides goods and services. In such
economies government supplies roads, defense, pensions,
and sometimes-even schooling directly to the citizens.
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2. Answer : (a)
Reason : When the income elasticity is greater than one, the good is
said to be luxury.
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3. Answer : (b)
Reason : On a straight-line demand curve elasticity of demand at any
point is equal to lower segment of the demand curve / upper
segment.
Option (a) is incorrect as elasticity of demand at midpoint is
equal to one.
Option (b) is correct as elasticity of demand falls as we move
down the demand curve.
Option (c), (d) and (e) are incorrect as elasticity of demand
falls as we move down the demand curve.
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4. Answer : (c)
Reason: When a decrease in price leads to increase in quantity
purchased so much as to increase the total revenue, the price
elasticity of demand is more than unity.
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5. Answer : (a)
Reason : The demand curve is Qd = 200 – P
The quantity demanded is Q = 200 – 75 => Q =125
Therefore dQ/dP = -1 (the slope)
Therefore point elasticity of demand = dQ/dP?P/Q
Therefore, Ed = -1 ?(75/125)= - 0.6.
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6. Answer: (a)
Reason : Demand : 20 = 104 – 4Q
4Q = 84
Q = 21
Supply : 20 = 2 + 0.5Q
0.5Q = 18
Q = 36
Surplus : 36 – 21 = 15 units.
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7. Answer : (b)
Reason : When tax is imposed, buyer and seller share the tax based on
the opposite ratios of their elasticities. Thus,
Ed = -80P/Q
Es = 40P/Q
Ratio of Es: Ed = 1: 2
Burden on consumer = 12 x 1/3 = 4
Earlier equilibrium price: 5,800 – 80P = 1,000 + 40P
4800 = 120P
P = 40
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Thus, new price = 40 + 4 = Rs.44.
8. Answer : (d)
Reason : Q = 10,000 – 1500(5) + 2(5000) + 200(8)
= 21,600 – 7,500
= 14,100
Income elasticity of demand: dQ/dY ??Y/Q = 2 ?
5000/14100 = 0.709
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9. Answer : (e)
Reason : a. False. A consumer tends to maximize total utility (TU)
rather than marginal utility (MU). TU will be maximum
when MU is equal to the price paid by the consumer. If
the MU is greater than the price, the consumer can
increase TU by consuming more of the good. If MU is
less than the price, the consumer can maximize TU by
decreasing consumption of the good.
b. False. Apart from tastes and preferences (indifference
map), price of the product and income level of the
consumer (budget line) also determine how much of a
good a consumer will buy.
c. False. If magnitude of increase in demand is greater
than the magnitude of increase in supply, price will
increase. On the other hand if increase in supply is
greater than the increase in demand, price will decrease.
d. False. If the good under consideration is an inferior
good, increase in income would cause the demand to
fall.
e. True price and quantity demanded is inversely related
for normal goods.
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10. Answer : (c)
Reason : The demand curve of the consumer can be derived from the
price consumption curve. A price consumption curve
represents the successive points of tangency between the
different budget lines and the indifferent curves. Each point
on the (PCC) represents a price and quantity combination.
By plotting these price-quantity combinations, we can get the
corresponding point on the demand curve.
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11. Answer : (d)
Reason : When the management of a company has increased the salary
of the staff by 10%, it will not affect the implicit cost.
Implicit cost incurred by a firm is actually the opportunity
cost of the factor owned by him. Opportunity cost of any
input is the next best alternative use that is sacrificed by its
present use. It indicates what a factor can earn in the next
best use.
(a) Is not answer because when there is an increase in
salary of the staff by 10%, economic cost increases.
(b) Is not answer because when there is an increase in
salary of the staff by 10%, accounting profit decreases.
Because accounting profits is the firm’s total revenue
less its economic cost. So when the economic cost
increases, accounting profits decreases.
(c) Is not answer because when there is an increase in
salary of the staff by 10%, direct cost increases.
Because direct costs are costs which can be directly
contributed to production of a given product.
(d) Is the answer because when there is an increase in
salary of the staff by 10%, implicit cost will not be
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affected.
(e) Is not answer because when there is an increase in
salary of the staff by 10%, fixed cost is affected, since
salary paid to administrative staff is fixed in nature.
12. Answer : (c)
Reason : MUA/PA = MUB/PB
1050/PA = 1575/60
PA = 1050 x 60/1575 = Rs.40.
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13. Answer : (b)
Reason : The consumer will consume till MUY = PY
MUY = 6Y
0.5Y = 10 Y = 20 units.
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14. Answer : (c)
Reason : The relationship between marginal product curve and
average product curve is such that when marginal product
curve cuts average product curve, the average product will be
at its maximum point. (a)Maximum point is reached when
MR = MC. (b)Total product reaches maximum when MP =
0. (c)When MP = AP, AP will be maximum. (d) Marginal
product will be maximum, when ??MP/ ??L = 0.(e)Marginal
product will be zero, when employing of an additional labor
does not result in increase of total product.
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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.
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16. Answer : (d)
Reason : TPL = 20L – L2
MPL = 20 – 2L
Marginal returns become negative, once MPL equals zero.
Thus,
20 – 2L = 0
Or, L = 10.
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17. Answer : (c)
Reason :
MRTSL,K =
L
K
MP
MP
Q = 10K0.5 L0.5
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MPL=
Q
L
?
??= 5L0.5 – 1 = 5(L)–0.5 = 0.5
5
L
MPK =
Q
K
?
??= 5K0.5 –1 = 5(K)–0.5 = 0.5
5
K
??MRTSL,K =
0.5
0.5
5
L
5
K =
0.5
0.5
5 K
L 5
?
=
0.5
0.5
K
L =
K
L .
18. Answer : (e)
Reason : Increasing returns to scale implies that a one percent increase
in the combination of inputs leads to increase the output by
more than one percent. Hence 22% increase could be the
possible answer. Hence the correct answer is (e).
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19. Answer : (c)
Reason : TC = 20Q – 0.25 Q2 + 0.01Q3
MC =
dTC
dQ = 20 – 0.5 Q + 0.03Q2
MC is minimum when
dMC
dQ = 0
dMC
dQ = -0.5 + 0.06 Q = 0
0.06 Q = 0.5
Q = 8.33
Q = 8 (approx).
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20. Answer : (c)
Reason : Consumer surplus is the difference between what the
consumer is willing to pay and what he actually pays. The
maximum a consumer is willing to pay will be equal to the
utility he expects from the good. Therefore, consumer
surplus can also be defined as the difference between the
total utility derived and the amount of money paid by the
consumer.
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21. Answer : (d)
Reason : Opportunity cost of an hour of coaching for Sachin
Tendulkar is equal to the best opportunity forgone because of
coaching i.e. acting Rs.30,000.
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22. Answer : (b)
Reason : Total cost of producing four units of output = 6 + 5 + 4 + 5 =
20. Thus, the average cost of the firm = 20/4 = 5.
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23. Answer : (d)
Reason : AC = TC/Q = 300-10Q +Q2
If Q =10AC = 300- (10?10) +102= 300-100 + 100 = Rs.300.
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24. Answer : (d)
Reason : Insurance premiums on property is an example of fixed cost.
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25. Answer : (e)
Reason : a. Long run average cost (LAC = LTC/Q) is U-shaped
because of economies of scale initially and
diseconomies of scale at later stages of production.
b. Long run marginal cost (LMC = ?LTC/?Q) is U-shaped
as cost of producing additional units reduces at the
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beginning because of economies of scale, but raises
later due to diseconomies of scale.
c & d. Short run average cost (SAC = STC/Q) and AVC (=
TVC/Q) falls and raises due to operation of ‘law of
diminishing marginal productivity’.
e. Average fixed cost (AFC = TFC/Q) falls at a decreasing
rate with the increase of output because of constant total
fixed cost.
26. Answer : (e)
Reason : Least-cost production implies that the producer produces a
given level of output where the marginal physical product to
the factor price ratio is equal to the factor inputs.
a. It is not appropriate in this instance because it is
indicating that all factor prices are equal indicates the
demand and supply of that factor.
b. It is not appropriate in this instance because it indicates
the addition to total output by the employment of an
additional unit of a factor of production all else equal.
c. It is not appropriate in this instance because marginal
physical product is the slope of the total output curve
and therefore will not indicate the least cost production.
d. It is not appropriate in this instance because it is not
indicating the least-cost-production.
e. It is appropriate in this instance because, it is the change
in the total revenue of the firm that results from the
employment of one additional unit of a factor of
production. Therefore the marginal physical product to
factor price ratio equal to the factor inputs indicates the
least-cost production. The correct answer is (e).
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27. Answer : (d)
Reason : In this case, the firm makes more than normal profits. Here,
average revenue is more than average cost.
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28. Answer : (d)
Reason : In the short run a firm cannot avoid fixed costs. Whether the
firm undertakes production or not the fixed costs are incurred
by the firm. Therefore, the deciding factor for the firm is
whether it is able to recover its variable costs or not. As long
as the revenue (price) is greater than the variable (average
variable) cost it is in the interest of the firm to undertake
production.
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29. Answer : (d)
Reason : Perfect competition is a form of market structure which
represents a market without rivalry among the individual
firms. The characteristics of perfect competition are: Large
number of buyer and sellers Homogeneous product No
barriers to entry Perfect information Perfect mobility of
factors of production. There are large number of buyers and
the demand curve which is the marginal revenue curve is
horizontal to the x-axis implying that the producer can
produce as much as the quantity of output for a given level of
price. All the additional goods can be sold at the market price
only, hence in a perfect competition, P = MR = AR. Hence
the correct answer is (d).
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30. Answer : (b)
Reason : (a) True. In perfect competition there are many sellers and
buyers
(b) Not true. In perfect competition firms do not have any
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price making power as there are many sellers and the
product is homogeneous.
(c) True. In perfect competition product sold by all the
firms is assumed to be homogeneous.
(d) True. In perfect competition entry and exit of firms is
free.
(e) True. In perfect competition buyers and sellers have
access unlimited information which is available free of
cost.
31. Answer : (d)
Reason : Average revenue = total revenue/ no. of output sold = 290/29
= Rs.10.
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32. Answer : (d)
Reason : At break-even, TR = TC
TR = P x Q = 5Q
Thus, 5Q = 2850 + 3.5QOr, 1.5Q = 2850
Or, Q = 2850/1.5 = 1900 units.
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33. Answer : (b)
Reason : A firm will shut down its operations if the price is less than
average variable cost. Since under perfect competition, price
is also equal to marginal revenue, the firm will continue
operations in the short run so long as price is at least equal to
average variable cost. Thus the minimum price, which the
firm will shut down, is the minimum average variable cost.
AVC = 300 – 40Q + 2Q2 Minimum average variable cost:
??AVC/ ??Q = 0 Thus, -40 + 4Q = 0 Or, Q = 10 When the
firm is producing 10 units, then AVC = 300 – 40(10) +
2(100) = 100.Thus, if price falls below Rs.100.
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34. Answer : (e)
Reason : There is no specified supply curve for monopolist.
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35. Answer : (a)
Reason : Single buyer is not a characteristic of monopoly.
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36. Answer : (d)
Reason : Free entry and exit of firms is not a predominant feature of
the oligopolistic market.
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37. Answer : (a)
Reason : Kinked-demand curve is used to explain price stickiness
under oligopoly. This is because of the discontinuity in the
MR curve caused by the kink in the demand curve. Even if
MC curve shifts substantially with in the gap of MR curve,
profit maximizing price and output of the oligopolist does
not change and price remain stabble.
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38. Answer : (b)
Reason :
MC = ??TC/ ??Q = 10
Australia: MC = MRA
10 = 120 – 20QA
QA = 110/20 = 5.5 units
or P = 120 – 10(5.5) = Rs.65.
England: MC = MRE
10 = 52 – 6QE6QE = 42
Or, QE = 42/6 = 7 units
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P = 52 – 3(7) = Rs.31
Price differential :65 – 31 = Rs.34.
39. Answer : (d)
Reason : To find profit maximizing output MC must be equated to
MRP = 400 – 20 Q,
TR = 400Q – 20 Q2.
MR =dTR/dQ=400 – 40 Q
and MC = dTC/dQ =40Q
MR = MC =400 – 40 Q =40 Q
80Q = 400
Q = 5 units.
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40. 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. A firm’s assets are 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
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41. Answer : (a)
Reason : a. Value addition is equal to value of output less value of
inputs. By summing up all the value additions in the
economy GDP of the economy can be computed, which
is called value added approach to measuring GDP.
Hence the answer is (a).
b. By adding all the incomes of factors of production in
the economy, GDP can be computed which is called
income approach to measuring GDP. Hence (b) is not
the answer.
c. Is not the answer as we get real GDP by removing the
effect of inflation from nominal GDP.
d & e. Is not the answer as we get GDP through expenditure
approach by summing up all the expenditures incurred by the
ultimate buyers on the goods and services produced by the
domestic sector.
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42. 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
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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.
43. Answer : (e)
Reason : GDP Deflator is a price index, which is used to measure the
average level of the prices of all goods and services that
make up GDP.
(a) Is not the answer because it is a true statement that GDP
deflator is otherwise known as implicit price deflator.
(b) Is not the answer because GDP deflator reflects the
change in overall price level in the economy.
(c) Is not the answer because GDP deflator is the most
comprehensive index of price.
(d) Is not the answer because GDP deflator is used to
measure real GNP i.e. GNP in rupees of constant
purchasing power. If prices are rising, the nominal GNP
during the latter period to account for the effects of
inflation.
(e) Is the answer because GDP deflator doesn’t measure
economic growth.
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44. Answer : (a)
Reason : In the Circular flow model all the factors of production are
owned by Housholds and all the production activity is
undertaken by firms in the Business sector. Households
provide factor of production to firms in return for factor
payments. Business sector (firms) produce and sell goods
and services to the Households.
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45. Answer : (e)
Reason : Personal disposable income = Personal income – Personal
taxes.
(a) Is not the answer because the difference between
personal disposable income and personal income is not
residential investment.
(b) Is not the answer because the difference between
personal disposable income and personal income is not
indirect taxes.
(c) Is not the answer because the difference between
personal disposable income and personal income is not
subsidies.
(d) Is not the answer because the difference between
personal disposable income and personal income is not
transfer payments.
(e) Is the answer because the difference between personal
disposable income and personal income is personal
taxes
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46. Answer : (b)
Reason : NNP at market price = GNP at market prices – Depreciation
= 17,000 – (1,200 – 700) = 16500
NNP at factor cost = NNP at market prices – Indirect taxes +
subsidies
= 16500– 600+ 200
= 16100
Net factor income from abroad =NNP at factor cost–NDP at
factor cost (Factor income earned with in domestic territory)
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= 16100– 13000 = 3,100MUC.
47. Answer : (e)
Reason : National Income = GNP at market price – Depreciation –
Indirect taxes + Subsidies
= 8500–950–865+100
= 6785
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48. Answer : (c)
Reason : National income = NNP at factor cost
NNP at factor cost = GDP at market price – Indirect taxes +
subsidies + NFIA – Depreciation
Or, GDP at market price = NNP at factor cost + Indirect
taxes – subsidies - NFIA + Depreciation
= 48000 + 11400 – 6000 – (– 3000) + 12000 = 68400 MUC.
Where NFIA = (Factor income received from abroad –
Factor income paid abroad) = (9000 – 12000) = -3000 MUC
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49. Answer : (e)
Reason : a. Consumption depends on the income and as income
increase consumption also increase.
b. Propensity to consume refers to the changes in
consumption as a result of change in income. Hence
propensity to consume effects consumption.
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.
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50. Answer : (c)
Reason : National income (NNP at FC) = wages & salaries + interest
income + rental income + profit.
Or, Profit = 3000 – 1800 – 450 – 400 = 350.
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51. Answer : (c)
Reason : Consumption curve depicts the relationship between
consumption and income.
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
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.
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.
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.
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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52. Answer : (e)
Reason : APS + APC = 1
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If APS < 0 , APC > 1
53. Answer : (b)
Reason : Monetary policy mainly controls the economy by regulating
the interest rates through changes in money supply. If the
private investment is more sensitive to interest rate, then
monetary policy can more effectively regulate the economy.
a. A recessionary condition cannot make a monetary
policy more effective.
b. When private investment is more sensitive to interest
rate monetary policy will be more effective as a small
change in the interest rate would lead to a greater
change in the output.
d. During liquidity trap, the effectiveness of monetary
policy decreases because during such policy, changes in
interest rate cannot have any effect on investments.
e. Effectiveness of the monetary policy is not determined
by the phases of business cycle.
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54. Answer : (a)
Reason : Total money = Rs.10,000.
25% of total money which is held in the form of currency is
Rs.2,500.
Demand deposit component of money supply is Rs.10,000 –
Rs.2,500 =Rs.7,500
Given the reserve ratio of 12%, required reserves are 7,500 ?
0.12 = Rs.900.
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55. Answer : (a)
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.
So the answer is (a).
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56. Answer : (c)
Reason : Fiscal deficit is revenue expenditure such as subsidy, interest
payments defense expenditure, salaries and pensions
financed by borrowings.
(a) Is not the answer because subsidies does not cause for
growing fiscal deficit of the Union Government
(b) Is not the answer because interest payments does not
cause for growing fiscal deficit of the Union Government
(c) Is the answer because reduction in revenue expenditure
is responsible for growing fiscal deficit of the Union
Government
(d) Is not the answer because employee salaries/pensions
do not cause for growing fiscal deficit of the Union
Government
(e) Is not the answer because defense expenditure does not
cause for growing fiscal deficit of the Union Government
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57. Answer : (b)
Reason : Bank rate is the rate of which commercial banks can borrow
from the Central Bank by discounting eligible bills with the
Central Bank.
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58. Answer : (c)
Reason : Supply side economics advocates promoting competition,
decreasing role for the state, incentives to production sector
like decreasing tax rates and reducing government controls
and removing institutional barriers to increase efficiency.
Supply-side economics do not advocate increase in the tax
rate. Hence answer is (c).
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59. Answer : (c)
Reason : Alternatives II and IV does not involve marketable
transaction hence ignored in calculation of national income.
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60. Answer : (a)
Reason : Phillips curve in the short-run shows an inverse relation
between inflation and unemployment. But in the long run
there is no trade-off because Phillips curve is vertical in the
long-run.
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61. Answer : (a)
Reason : As the purchasing power of rupee decreases in future, due to
inflation, the real value of money paid by the borrowers to
the lender would be less. If inflation is anticipated, the lender
would include them in the interest rate.
a. An unexpected increase in inflation makes the borrower
to pay back money that has less real value than was
expected. As nominal interest rates do not include
unexpected inflation, real interest rate would be less
than the expected rate. Thus, borrower will be benefited
from unanticipated inflation.
b. Fixed income earners get only fixed nominal income.
With the inflation, the real value of money received
decreases. Hence they are losers during inflation.
c. Inflation reduces the purchasing power of the rupee
held and thereby reduces the value of rupee held by the
currency holders.
b. Because of unexpected increase in inflation the lender
receives money from the borrower which has a lesser
real value than expected. Interest rate on loans only
comprises expected inflation. Thus, lenders would
suffer from unexpected inflation by quoting less interest
rate than it should have been.
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62. Answer : (c)
Reason : An expansionary monetary policy is undertaken to stimulate
an economy moving at a slow pace. By injecting additional
money supply and easing the liquidity in the banking system
easy credit is made available for productive endeavor. A
reduction in cash reserves increase lend able resources of
banks. The correct answer is C – along with it, reduction in
bank rate and buying government securities stimulate the
economy. Devaluation is undertaken in an extreme case of a
persistent deficit in BOP.
(a) Is not the answer because increase in bank rate is a
contractionary monetary policy.
(b) Is not the answer because increase in cash reserve ratio
is a contractionary monetary policy
(c) Is the answer because reduction in cash reserve ratio is
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an expansionary monetary policy
(d) Is not the answer because selling government securities
in open market is not an expansionary monetary policy
(e) Is not the answer because devaluation of the currency is
not an expansionary monetary policy.
63. Answer : (a)
Reason : Automatic stabilizers refer to those government spending and
tax revenues that change automatically as the economy
fluctuate. This prevents aggregate demand from falling
excessively during bad times and rising during good times.
National defense spending is not an automatic stabilizer
because it is less concerned with the ups and downs in the
economy.
a. National defense spending changes depending upon the
security situation and not on the business cycles. Thus,
national defense spending does not signify an automatic
stabilizer.
b. Social welfare payments are made during economic
downturns that prevent aggregate demand from falling
excessively during economic downturn. But, once the
economy picks up the social welfare payments will
decrease which prevent aggregate demand from rising
excessively.
c. Unemployment compensation payments increase during
the economic downturn because of higher rate of
unemployment caused by reduced business activity.
Unemployment compensation payments prevent
aggregate demand from falling excessively during
economic downturn. On the contrary, these payments
will be low no sooner than the economy picks up. This
prevents aggregate demand from rising excessively.
d. & (e) tax revenues automatically change depending
upon the profits generated by the firms. It would be
lower during downturn and higher during boom.
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64. Answer : (c)
Reason : Consumption function for an economy is estimated to be c =
400 + 0.75 Yd
Y = C + S
When S = 0, Y = C
??Y = 400 + 0.75 Y
or, 0.25Y = 400
Yd = 1,600
??c = 400 + 0.75 ( 1,600) = 400 + 1,200 = Rs.1,600 cr.
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65. Answer : (c)
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
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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 highpowered
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.
66. Answer : (d)
Reason : Outside lag ’is the duration involved for output and
employment to respond to changes of the implemented of
policies. Taxes has the least outside lag.
(a) Is not the answer because cash reserve ratio has not the
least outside lag.
(b) Is not the answer because bank rate has not the least
outside lag
(c) Is not the answer because repo rate has not the least
outside lag
(d) Is the answer because tax has the least outside lag.
(e) Is not the answer because open market operation has
not the least.
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67. Answer : (d)
Reason : a. Reserves with RBI (both surplus reserves and statutory
reserves) are assets of a commercial bank.
b. Loans given to public sector undertakings are assets of
the banks.
c. Credit given to any individual, firm or government is an
asset to the bank lend.
d. Deposits from the public are liabilities to the bank
because it has to repay the amount at a later time.
e. Discounted commercial bills from the public are assets
to the bank because it purchased (discounted) the bills
from the holder of the bill.
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68. Answer : (d)
Reason : A depression is immediate followed by recovery
(a) During recovery unemployment rate decreases because
of picking up of economy activity
(b) Depression is immediately followed by recovery and
not recession
(c) Only during boom there will be rapid increase in wages
because of high business activity
(d) It is true that during recovery the cost of production will
gradually increase because of gradual increase in wages
(e) Production will increase moderately during recovery.
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69. 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 ,succeeded
by further expansion are referred to as business cycles.
Certain features characterize each of the phases.
(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) 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) 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 is classified. Hence real GDP is
the correct option.
(d) Changes in inventory level do give an indication about
the different phases, but the changes inventory levels
are as a result of changes in real GDP.
(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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70. Answer : (a)
Reason : Overall balance of payment = Total Credit of the Bop – Total
debit of the Bop
= 439677 – 378737 = Rs.60940million (surplus)
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71. Answer : (d)
Reason : Velocity of money =
Total expenditure(PY)
Money supply (M)
Total expenditure = C + I + G = 1000+340+280 =
1620
Money supply = 1620/4 = Rs.405cr.
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72. Answer : (a)
Reason : High powered money = monetary liabilities + government
money = 10,500 + 1,500 = 12,000
Ms = H ??????????u u 1?C / C ?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%.
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73. Answer : (c)
Reason : Change in foreign exchange reserves = Current account
balance + Capital account balance
Current account balance = (116,320 + 230,010 + 4000 +
1000) - (140,240 + 125,234 + 2000) = 351330 – 267474 =
83856 i.e. current account surplus (Credit)
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Thus, change in foreign exchange reserves = 83856 +
202,000 = 285856 MUC.
74. Answer : (a)
Reason : Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where
High powered money = monetary liabilities of the central
bank + government money.
?Ms = ?H. m
When foreign exchange reserves of the country decline by
Rs.200 MUC, the monetary liabilities also fall by 200 MUC.
Thus, money supply decline by 4.8 x 200 = 960.
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75. Answer : (c)
Reason : Y = C + I+ G
Y = 70 + 0.75Yd + 80 + 70
Y = 70 + 0.75 (Y – 0.2 Y)+ 80 + 70
Y = 70 + 0.75 Y – 0.15 Y+ 80 + 70
Y = 220 – 0.6Y
Y = 550
??Budget deficit = T – G = 0.2 (550) – 70 = 110 – 70 = 40
MUC.
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76. Answer: (c)
Reason: Multiplier is the reciprocal of marginal propensity to save
(MPS)
Multiplier = 1/MPS
1
0.25 = 4.
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77. Answer : (a)
Reason : Intermediation Ratio = Secondary issues/New issues
Or, secondary issues = Intermediation ratio x New issues =
0.7 x 30,000 = 21,000 MUC
Total issues = New issues + Secondary issues = 30,000 +
21000 = 51,000 MUC
Financial Interrelations Ratio = Total issues/Net Physical
Capital Formation (NPCF)
= 51000 /42500 = 1.2.
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