My Profile
Active Members
TodayLast 7 Days
more...
Awards & Gifts
Online Exams
Fresher Jobs
Our fresher job section is exclusively for fresh graduates! Find jobs for freshers in major Indian
cities including Bangalore, Chennai, Hyderabad, Pune or Kochi
Resources
Find educational articles, blogs, discussion threads and other resources.
Colleges
Find details about any college in India or search for courses.
|
Download Model question papers & previous years question papers
|
Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2006 ICFAI University M.B.A Suggested Answers Economics - II (MB142): July 2006 Question paper
Suggested Answers Economics - II (MB142): July 2006
75. Consider the following information:
The money multiplier is
(a) 5.75 (b) 6.50 (c) 7.75 (d) 8.25
(e) 9.50.
(1 mark)
High powered money Rs. 8,800 cr.
Currency deposit ratio in the economy 15%
Cash reserve requirement of the central bank 5%
< Answer >
76. Disguised unemployment arises when
(a) There is downturn in business activities
(b) There are structural changes in the economy
(c) Marginal productivity of labor is zero
(d) Marginal productivity of labor is increasing
(e) Marginal productivity of labor is decreasing.
(1 mark)
< Answer >
1. Answer : (b)
Reason : According to the classical economists, full employment corresponds to a situation where
actual and potential GDP are equal. When actual GDP is less than potential GDP, the
resources are not being fully utilized and when actual GDP is more than potential GDP, there
is overutilisation of the existing resources.
< TOP >
2. Answer : (b)
Reason : Nominal rate of interest = Real rate of interest + Inflation = 1 + 2 = 3%
< TOP >
3. Answer : (c)
Reason : National income = total issues / finance ratio
Total issues = primary issues + secondary issues
Secondary issues = intermediation ratio ??new issues
0.78?24,000 = 18,720
Total issues = 24,000 + 18,720 = 42,720
National income = 42,720 / 0.25 = 170880
< TOP >
4. Answer : (e)
Reason : National income = NNP at factor cost
= NDP at factor cost + Net income from abroad
NDP at market prices – indirect taxes + subsidies + net factor income from abroad
33878 – 4272 + 708 + 92
= 30406
< TOP >
5. Answer : (c)
Reason : GDPFC
= NDPMP + Depreciation – Indirect Taxes + Subsidies
Depreciation = Gross domestic investment – Net domestic investment
= 1,600 – 1,300
= 300.
GDPFC = 10,000 + 300 – 1,900 + 200
= 8,600 MUC.
< TOP >
6. Answer : (a)
Reason : Subsidies= GNP at Factor Cost + Indirect Taxes – GNP at Market Prices.
= 95,023 + 14,723 – 1,07,226 = 2,520.
< TOP >
7. Answer : (b)
Reason : National income minus corporate profits minus social security taxes plus transfer payments
equal personal income. This is the true statement.
< TOP >
8. Answer : (c)
Reason : Corporate profits = Corporate profit tax + Dividends + Retained earnings
= 50 + 15 + 20 = 85
< TOP >
9. Answer : (c)
Reason : NNP at market prices + depreciation = GNP at market prices. Thus, if NNP at market prices
remain constant, GNP at market prices rises by a amount equal to the rise in depreciation.
(c) It is the answer.
< TOP >
10. 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
< TOP >
11. Answer : (d)
Reason : At the equilibrium level of output as defined by the Keynesian cross, the aggregate demand
equals national income and planned investment equals planned savings.
(d) is the answer.
< TOP >
12. Answer : (d)
Reason : In a macroeconomic model without foreign trade or government investment, aggregate
demand is the sum of consumption expenditure and investment expenditure. When there is
foreign trade and government spending, aggregate demand = C +I+G+ (X-M)
< TOP >
13. Answer : (d)
Reason : When the MPC is 0.75, the multiplier is 4.A decrease in planned investment of 20 MUC will
cause the output to decline by 20 ??4 = 80 MUC
[The multiplier is given by 1 / (1-MPC) = 1 / 1-0.75 = 1 / 0.25 = 4]
(d) is the answer.
< TOP >
14. Answer : (b)
Reason : When there is equilibrium, we have 65 – 220i = -50 + 0.25 Y or
0.25 Y = 115 – 220ior Y = 460 – 880i Substituting I = 0.10, we have Y = 460 –88 = 372
MUC.
< TOP >
15. Answer : (d)
Reason: When goverbnment bonds are purchased by the RBI through open market operations, the
money supply increases. This will reduce the rate of interest
< TOP >
16. Answer : (c)
Reason: National Income = NNP at factor cost
= NNP at market prices – Indirect taxes + Subsidies
= Rs.1,00,000 – 14,000 + 2,000 crores
= Rs.88,000 crores
Personal income = National Income – Corporate profit taxes – Retained profit
= Rs.88,000 – 6,500 – 30,000 crores
= Rs.51,500 crore
< TOP >
17. Answer : (c)
Reason : Multiplier is given by 1 / 1-MPC or 1 / MPS.Thus the multiplier in this case is 1 / 0.2 =5
< TOP >
18. Answer : (d)
Reason : ??Consumption function = 1000 + 0.80Yd
When C = Yd
Yd – 0.80 Yd = 1000
Yd = 5000
?The answer is (d).
< TOP >
19. Answer : (a)
Reason : At equilibrium, Y = C + I = C + S
Aggregate consumption function = (100 x 50) + 0.7Yd = 5000 + 0.7Yd = 5000 + 0.7(50000)
= 40000. Thus, investment (I) = Saving (S) = 50000 – 40000 = 10000.
< TOP >
20. Answer : (b)
Reason : Any policy that injects reserves into the banking system will increase the availability of credit
and reduce interest rates. Lower interest rates in turn stimulate investment, aggregate demand,
and output.
< TOP >
21. Answer : (d)
Reason : A variable is defined as a stock variable if it is measured at a point of time and as a flow
variable if it is measured over a period of time. Of all the variables listed, only inflation is
measured over a period of time and hence is a flow variable.
< TOP >
22. Answer : (c)
Reason : The balance of payments is divided into two major accounts, the current account and the
capital account.
< TOP >
23. Answer : (a)
Reason : It would be appropriate for the RBI to pursue a contractionary monetary policy during a
period of inflation. Through contractionary monetary policy RBI would like to moderate the
aggregate demand in the economy thereby causing the prices to fall. Of all the options, only
open market sale of government securities is a contractionary monetary policy. All other
options are expansionary monetary policies.
< TOP >
24. Answer : (c)
Reason : Current account captures the transactions related to trade in goods and services, transfer
payments and factor incomes. If foreign exchange out flow on account of these is more than
inflows, the current account is in deficit.
< TOP >
25. Answer : (b)
Reason : High-powered money (H) = Government money + Monetary liabilities of the Central Bank =
20,000 + 2000 = 22,000 MUC.
Money supply, Ms = H x {(1 + Cu)/(Cu + r)}
Or, 22,000 x {(1.25/0.25 + r)} = 50,000
0.55 = 0.25 + r
Or, r = 0.3.
< TOP >
26. Answer : (c)
Reason : Money Supply = Net bank credit to Government + Bank credit to commercial sector + Net
foreign exchange assets of the banking sector – Net non-monetary liabilities of the banking
sector +Government money
= 2000+3000+2200-1200+200
= Rs.6200billion
< TOP >
27. Answer : (d)
Reason : Y = C + I
Y = 70 +0.8Y + 90
Y = 160 + 0.8Yd
0.2Yd = 160
Y = 800 MUC
< TOP >
28. Answer : (b)
Reason : The term monetised deficit refers to the net RBI credit to the government.
< TOP >
29. Answer: (c)
Reason: The Consumer Price Index is used to capture the effect of a price increase or decrease
relative to a base year. If the consumer price index are doubled , this means that the prices in
an average consumers basket has more than doubled.
< TOP >
30. Answer : (c)
Reason : Since resources are limited and human wants are unlimited, only sacrificing one good more
of other goods can be produced
< TOP >
31. Answer : (b)
Reason : The current account balance is the trade balance (120-180 = -60) plus the net investment
income (213-260 = -47) plus net transfers received (-30). The result is Rs.137 million deficit
< TOP >
32. Answer : (d)
Reason : A business cycle is a phenomenon where economic expansion is followed by an economic
contraction
< TOP >
33. Answer: (b)
Reason: Automatic stabilizers are built- in mechanisms that helps in restoring price stability and full
employment in an economy. When the economy is in a recession, the personal tax, being an
automatic stabilizer, will automatically fall and this will reduce the revenues of the
government. This implies an increase in the budget deficit.
< TOP >
34. Answer : (b)
Reason : If a producer increases the price of a product due to increase in labor cost per unit of output,
then it is termed as Wage-push inflation.
< TOP >
35. Answer : (b)
Reason : Option (b) is classified as cost-push factor of inflation. Options (a), (c) and (d) are classified
as demand-pull factors of inflation.
< TOP >
36. Answer: (b)
Reason: According to classical economists, the economy will always tend towards full employment
due to the assumption that wages and prices are flexible. There cannot be involuntary
unemployment in the classical system since the assumption is that any unemployment is
solved by a reduction of real wages, which ensures that more workers are employed. With the
lower real wage, business firms will have an incentive to hire more workers.
< TOP >
37. Answer : (b)
Reason : The difference between a country merchandise exports and its merchandise imports is the
balance of trade.
< TOP >
38. 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.
< TOP >
39. Answer : (d)
Reason : At break-even level of disposable income, savings are zero.
??S = –150 + 0.25Yd = 0
0.25 Yd = 150
Yd = = 600.
150
0.25
< TOP >
40. 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
m= (1+Cu) /( Cu + r)
= (1+0.2)/ (0.2+0.05)
= 4.8
When foreign exchange reserves of the country decline by Rs.250 MUC, the monetary
liabilities also fall by 250 MUC. Thus, money supply decline by 4.8 x 250 = 1200 MUC.
< TOP >
41. Answer : (d)
Reason : Real GDP for 2005 = (Quantity of bread in 2005 x Price of bread in 2004) + (Quantity of
butter in 2005 x Price of butter in 2004) = (1500 x 20) + (2500 x 15) = Rs.67500.
Nominal GDP for 2005 = (Quantity of bread in 2005 x Price of bread in 2005) + (Quantity of
butter in 2005 x Price of butter in 2005) = (1500 x 25) + (2500 x 20) = 37500 + 50000 =
87,500.
GDP deflator = = (87500/67500) x 100 = 1.296 x 100 = 129.6 or 130
approximately.
NominalGDP
×100
RealGDP
< TOP >
42. Answer : (b)
Reason : High powered money = Monetary liabilities of central bank + Government money
Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary
liabilities
Financial Assets = Credit to government + credit to banks+ credit to commercial sectors +
foreign exchange assets
= 7,840 + 2,450 + 3850 + 1050= 15190
Non-monetary liabilities = 700 + 2940 = 3640
Monetary liabilities of central bank = 15190+350 – 3640 = 11900
High powered money = 11900 + 175 = 12075 MUC.
< TOP >
43. Answer : (c)
Reason : Velocity of money = Y/MS
Y = C+ I + G +E –M
5250+1575 + 350 + 1120 + 280 – 210 =8365??Velocity of money = 8365/ 1673 = 5.
< TOP >
44. Answer : (d)
Reason : When the money supply increases the interest rate decreases. This will increase the
investment Demand which will increase GNP. .
< TOP >
45. Answer : (d)
Reason : Technically recession is defined as decline in output for two or more consecutive quarters.
< TOP >
46. Answer : (d)
Reason : The term fiscal policy comes from the word’fisc’meaning exchequer. It is dealing with the
revenue and expenditure policies of the government to achieve full employment.
d. It is the answer.
< TOP >
47. 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.
< TOP >
48. Answer : (c)
Reason : Wages and salaries paid by the government = Factor income received by households –
(wages and salaries paid by the business sector + Dividends paid to house holds + Factors
income receive abroad)
= 160 – 100 – 10– 20
= 30 MUC.
< TOP >
49. Answer : (c)
Reason : GNPMP = GDPFC + Indirect taxes – Subsidies + NFIA
NFIA = GNPMP – GDPFC – Indirect taxes
= 75,000 – 60,000 – 5,000
= 10,000
< TOP >
50. Answer : (b)
Reason : Multiplier = 1/1-MPC = and MPC = . The larger the marginal propensity to
consume the larger will be the multiplier. If the multiplier has a value of 3, it implies that if
investment increases by Re 1, the output will increase by Rs.3. Since the MPC will be 2/3, a
change in output of Rs.3 will result into an increase in consumption by Rs.2.
Y
I
?
?
C
Y
?
?
< TOP >
51. Answer : (e)
Reason : According to classical economicsts, money is used only as a medium of exchange and has no
value on its own. This is also called the classical dichotomy.
< TOP >
52. 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.
< TOP >
53. Answer : (b)
Reason : Money supply = High-powered money (H) x Money multiplier
80000 = H x {(1 + 0.2)/(0.2 + 0.1)}
Or, H = 20,000 MUC
H = Monetary Liabilities of the Central Bank + Government money = ML + 1050
Or, ML = 20000 – 1050 = 18950.
Total assets = Total liabilities (= Non-ML + ML)
Total liabilities = Net worth (6000) + Government deposits (150) + Other non-monetary
liabilities (3000) + Monetary liabilities (18950) = 28100.
Thus, total assets = 28100 = (10000 + 4000 + 5000 + 100 + Net foreign exchange assets)
Or, Net foreign exchange assets = 28100 – 19100 = 9,000.
< TOP >
54. Answer : (c)
Reason : The four stages of the business cycle in a sequential form are boom, recession, depression
and recovery
< TOP >
55. Answer : (e)
Reason : In the long run, the Philips curve is vertical. Hence the inverse relation between inflation and
unemployment do not hold.
< TOP >
56. Answer : (a)
Reason : An important difference between the approaches of the classical and Keynesian economists
use to achieve a macroeconomic equilibrium is that Keynesian economists actively promote
the use of fiscal policy; the classical economists do not. Classical economists believe
intervention can be de-stabilizing and advocate laissez- faire economy. Therefore the answer
is (a).
< TOP >
57. Answer : (b)
Reason : Expansionary fiscal policy refers to increase in government spending and decrease in taxes.
< TOP >
58. Answer : (b)
Reason : Marginal Propensity to consume = = = 0.5
C
Y
?
?
0.5
1.0
< TOP >
59. Answer : (b)
Reason : The Reserve Bank of India has three tools with which it can conduct monetary policy, and to
reduce the money supply it would have to either increase reserve requirements, raise the
discount rate, or decrease the monetary base by selling government securities. This means
that answer (b) is correct because to reduce the money supply the discount rate must be
increased, not decreased.
< TOP >
60. Answer : (e)
Reason : Financial assets of the banking system consist of all those assets (loans, foreign exchange
assets) which are which are under the control of the banks, including the central banks.
(a) RBI’s credit to government is considered as a financial asset, as the government is
liable to return to the RBI and also gives a nominal return.
(b) Similarly is the case with the other bank’s credit to the government, as said above is part
of the financial asset of the banking system.
(c) Credit given to the commercial sector also gives a return to the bank hence it is part of
the financial assets of the banking system.
(d) Buildings are physical assets and not financial assets and are shown as other assets in the
balance sheet of the bank.
< TOP >
61. Answer : (b)
Reason : The major function of the Reserve Bank of India is to control the nation’s money supply, and
its goals are to keep inflation low while trying to maintain full employment and ensure stable
exchange rate. The Reserve Bank of India cannot keep a check on fiscal policy because
government can only determine fiscal policy so answer (b) is the appropriate choice.
< TOP >
62. Answer : (c)
Reason : Per capita GDP measures the GDP per head. This is the most appropriate measure of the
standard of living of a country.
< TOP >
63. Answer : (a)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C + I + G
Or, Y = 0.80Y + 120 + 1000 + 400
Or, 0.20Y = 1520
Y = 7600
S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (7600– 100)
= – 200 + 1500
= 1,300 MUC.
< TOP >
64. Answer : (b)
Reason : Because of the double entry concept underlying the recording of transactions, BoP account
must always be in balance. Thus, ‘Balance in current account + Balance in capital account +
Change in reserves = Zero’. When there is no change in the foreign exchange reserves, then
‘balance in current account + balance in capital account = zero’ (or) balance in current
account = - (balance in capital account).
a. Balance in current account + Balance in capital account = Change in reserves. When
balance in current account ‘plus’ balance in capital account is zero, then balance in the
current account = - balance in capital account. Hence, statement (a) is not correct.
b. There will no change in the foreign exchange reserves of a country only when surplus
(deficit) in current account is equal to deficit (surplus) in capital account.
c. Current account balance may or may not be zero when the change in foreign exchange
reserves of a country is zero.
d. Trade balance (exports – imports) may or may not be zero when the change in foreign
exchange reserves of a country is zero.
e. Capital account balance may or may not be zero when the change in foreign exchange
reserves of a country is zero.
< TOP >
65. Answer : (b)
Reason : Money supply = High Powered money ??Money multiplier
??17,200 = 4,300. m
or, m =
?
or, 1+ Cu = 4Cu + 0.40
or, – 3Cu = –.0.6
or, Cu = 0.20
17, 200
4
4,300
?
1 Cu
m
Cu r
?
?
?
1 Cu
4
Cu 0.10
?
?
?
< TOP >
66. Answer : (b)
Reason : Multiplier = 1/MPS = 1/0.25 = 4.
Current level of income – Break-even income = 16,000 – 12,000 = 4,000
Required saving in the economy = 4,000/4 = 1, 000 MUC.
< TOP >
67. Answer : (c)
Reason : To counter the recession the fiscal and monetary policies should be expansionary.
a. Decrease in government expenditure is a contractionay fiscal policy. This measure will
worsen the recessionary situation.
b. Decrease in government expenditure is a contractionay fiscal policy. This measure will
worsen the recessionary situation.
c. Decrease in the discount rate increase money supply in the economy and is an expansionary monetary
policy. This will counter the recession by increasing the aggregate demand in the economy.
d. Decrease in money supply is a contractionay monetary policy. This measure will worsen
the recessionary situation.
e. Increase in the tax rate is a contractionay fiscal policy. This measure will worsen the
recessionary situation.
< TOP >
68. Answer : (b)
Reason : Depreciation is defined as the difference between gross investment and net
investment.
< TOP >
69. Answer : (b)
Reason : Reason : MPC = 0.6
Multiplier (m) =
?Y = m . ?I
???I = = 200
2.5
0.4
1
1 0.6
1
1 MPC
1
???
-
?
-
2.5
500
m
Y
?
?
< TOP >
70. Answer : (c)
Reason : The quantity theory equation is given by MV = PQ.
< TOP >
71. 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.
< TOP >
< TOP OF THE DOCUMENT >
72. Answer : (b)
Reason : The devaluation in the value of rupee is aimed at increasing exports. For example when the
rupee depreciates, it becomes cheaper in terms of the foreign currencies and hence imports
from India will be more attractive. In other words, our exports will become more attractive.
< TOP >
73. Answer : (b)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C + I + G
Or, Y = 0.80Y + 120 + 500 + 200
Or, 0.20Y = 820
Y = 4,100.
< TOP >
74. Answer: (c)
Reason : Inflation =??(225–200)/200)???100= 12.50
< TOP >
75. Answer: (a)
Reason : Money multiplier = = = 5.75
1 Cu
Cu r
_ ??_
_ _
_ ??_
1 0.15
0.15 0.05
_ ??_
_ _
_ ??_
< TOP >
76. Answer: (c)
Reason : Disguised unemployment arises marginal productivity of labor is zero.
< TOP >
Return to question paper search
|
|
|
Submit Previous Years University Question Papers and make money from adsense revenue sharing program
Are you preparing for a university examination? Download model question papers
and practise before you write the exam.
|
Watch TV Channels
|