1.

Due to frequent robberies, in the country of Asgard, a lot of ATM machines were
permanently shut down. The money multiplier in Asgard:
i) Increases
ii) Decreases
iii) Remains same
iv) Can’t say

People hold higher amount of cash, increasing the C/D ratio and lowering money
multiplier.

2. If the MPS is 0.4 and the disposable income is Rs. 100, then
a. Consumption and Saving cannot be determined from the given information
b. Consumption is Rs. 60 and saving is Rs. 40
c. Consumption is Rs. 40 and saving is Rs. 60
d. Consumption is Rs. 50 and saving is Rs. 50

Autonomous component of C is not given.

3. Hannah demonstrates the ‘transactions’ motive for holding money by:

i) Holding money for a ‘rainy day’
ii) Holding money waiting for bond prices to change
iii) Holding money to buy groceries
iv) None of the above

4. Suppose a small economy produces only cheese and fish. In 2005, 20 units of cheese
are sold at $5 each, and 8 units of fish are sold at $50 each. In 2004, the base year, the
price of cheese was $10 per unit, and the price of fish was $75 per unit. For 2005,
a. nominal GDP is $800, real GDP is $500, and the GDP deflator is 160.
b. nominal GDP is $500, real GDP is $800, and the GDP deflator is 160.
c. nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5.
d. nominal GDP is $800, real GDP is $500, and the GDP deflator is 62.5.

5. An increase in the price of imported apples:

a. Affects CPI but not deflator
b. Affects deflator but not CPI
c. Affects CPI and deflator both
d. Affects neither

6. An increase in money demand, other things equal, shifts the _____ curve to the
_____.
(a) IS; right
(b) IS; left
(c) LM; left (Higher int rates needed at every Y to maintain Money dd= Money ss)
(d) LM; right
7. Suppose an economy is given by:
C = 40 + 0.75YD
I = 140 – 10i
G = 100
T = 80
Md = 0.2Y – 5i
(M/P) s = 85

i) Find equilibrium income and interest rate. Y = 600 and i = 7 %

ii) Suppose the Government increases its expenditure on health centres across the
country by Rs. 65 crores, what would be the new equilibrium output. Can you
use the simple multiplier formula?
No the simple multiplier formula cannot be used because of the presence of
money market and role of interest rate. Full multiplier effect is not observed.
Replace G = 165 and resolve for interest rate and Y from scratch.

8. A Big Mac costs $ 4 in the United States whereas the price of the same burger in India
is Rs. 100. The nominal exchange rate currently is given by Rs. 70/$. Compute the real
exchange rate and interpret it.
R = ePforeign/ Pdomestic = 2.8 Indian goods/ American goods

If R appreciates ( say 2 Indian goods/American goods through changes in nominal

exchange rate of price levels( inflation) this implies, Indian goods are becoming
relatively expensive and are losing competitiveness.

9. An open economy is operating under a fixed exchange rate regime and having perfect
capital mobility. The Government in power lowers income tax to stimulate the
economy. How will the trade balance, GDP and nominal exchange rate change?
Contractionary fiscal policy shifts IS leftwards, fixed exchange rates
GDP falls, Trade balance improves and nominal exchange rate unchanged.

10. The price of availing education services has been increasing since the 1980s in the
United States.
a. Affects WPI, but not CPI
b. Affects CPI, but not WPI
c. Affects WPI and CPI both
d. Affects neither WPI nor CPI

11. In a simple Keynesian cross model with an autonomous investment (independent of

interest rate) and government sector with lumpsum taxes, investment multiplier is given
by:
a. 1/ 1-c
b. 1/ c-1
 c. 1/ 1-c(1-t)
d. 1/ c(1-t)

12. Which of the following is not a component of Current Account for India’s BoP?
i. Basmati rice exported to the United States
ii. Foreign Aid provided by India to Nepal
iii. Setting up of a new Toyota automobile plant in Chennai
iv. Remittances from Indians employed in Kuwait

FDI forms a part of capital account of BoP.

13. How do the following impact the money multiplier, ceteris paribus?
i. Increased network of ATMs
Cash holdings fall, C/D falls, Money multiplier increases
ii. Using mobile wallets such as PayTM, AmazonPay etc.
Cash holdings fall, C/D falls, Money multiplier increases
iii. Cutting down the informal sector
Cash dealings fall, C/D falls, MM increases
iv. Decrease in CRR
R/D falls, MM rises
v. Increase in discount rate
Borrowing costs for banks increase, they hold more reserves, R/D increases,
MM falls

14. Which of the following would tend to make the government expenditure multiplier
smaller?
A. an increase in the marginal propensity to consume
B. an increase in the marginal propensity to save
C. a reduction in taxes
D. None of the above

15. A contractionary monetary policy

(a) reduces interest rates.
(b) reduces real output.
(c) shifts the LM curve to the right.
(d) all of the above.

16. Assume that a country with a marginal propensity to consume of 0.5 is experiencing a
severe recession. By how much would government spending have to increase in order
to increase aggregate output by $200 billion?
a. $200 billion.
b. $40 billion.
c. $50 billion.
 d. $66.66 billion.
e. $100 billion.

17. The country Lala Land has a flexible exchange rate regime. What happens to the
nominal exchange rate and trade balance when (With or without Mundell Fleming)
i. Consumer confidence declines causing them to consume less.
C falls, IS shifts leftwards, e depreciates, and Trade balance improves
ii. Shift in preferences of consumers towards imported goods.
Imports increase, IS shifts left, e depreciates and trade balance improves.
iii. Government restricts exports of automobiles.
Exports fall, IS shifts left, e depreciates and trade balance improves.

18. Which of the following policy options would simultaneously increase interest rates and
decrease output?
A) The RBI sells bonds through open market operations.
B) The Central government increases its defence purchases.
C) The RBI expands the money supply.
D) The Central government increases the tax rate.

19. An increase in the money supply and a drop-in consumer confidence will lead to
A) A decrease in output with an ambiguous effect on the interest rate.
B) An increase in output and a decrease in the interest rate.
C) A decrease in output and an increase in the interest rate.
D) An ambiguous effect on output and an increase in the interest rate.
E) An ambiguous effect on output and a decrease in the interest rate.

LM shifts rightwards while IS shifts leftwards

20 . For a country following flexible exchange rate regime, exports for a particular year
equal $300 mn and imports equal $150 mn. Ceteris paribus, What will be the impact on
nominal exchange rate, exports and imports?
i) currency appreciates, exports fall, imports rise
ii) Currency depreciates, exports rise, imports rise
iii)Currency depreciates, exports fall, imports rise
iv)Currency appreciates. Exports fall, imports fall.

21. Which of the following are true about the definition of the marginal propensity
to consume?
a. It is the slope of the consumption function.
b. It is the change in consumption divided by the change in disposable income.
c. It is the amount by which consumption spending rises when disposable income
rises by one dollar.
d. All the definitions above are correct.