Institute of Rural Management Anand

PGDM-RM42 – Term II – Mid Term Examination

< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

1. One

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Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

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Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

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Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

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Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

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 Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

2. A) The difference between the current year fiscal deficit and the interest payment on the
previous borrowings is termed as Primary Deficit. Primary deficit and status of economy
follow inverse relationship. Lower the primary deficit, better the status of economy, better
the government has performed (meaning thereby that it has only taken borrowings for
payments of interest).
We see that there is no particular trend in the primary deficit as it doesn’t follow a set
pattern. However, a rise of 5.9% in revised numbers for FY21 indicates that government has
taken huge borrowings which is directly in-line with the current pandemic situation. The
debt on the government is on the higher end which isn’t good for economic health.
B) Following strategies must be adapted:

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 Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

- Borrowings must be reduced. It shouldn’t be used to meet the expenditure which

otherwise should be met by revenue account as it is not beneficial for the status of economic
health.
- Projects which are not providing returns and are termed as scraps should have their funds
allocated to areas which can provide better returns on investment
- Capital account should be allocated more share of spending in order to increase the
generation of capital which improves the economy of the country.
C) The Fiscal Responsibility and Budget Management (FRBM) Act 2003 requires the
government to keep the fiscal deficit below 3%, notwithstanding the fact that the fiscal
deficit grew in COVID19. This is because of a portion of the legislation that states that if
the country is afflicted by a natural or climatic calamity, the government can break from the
law and increase spending, and a no-show reason notice will be given to allow the
government to do so.

3. Low and stable inflation rates can serve beneficial to New Zealand due to the following
reasons –
i) Low inflation rates indicate productive and judicial utilization of resources. Higher
inflation rates demand higher time and resources involved to defend themselves from
rising inflation rates. People become more concerned in managing their portfolio to
avoid loss.
ii) Low inflation rates reduce uncertainty. More the inflation, more will be the
uncertainty, which in turn has negative effects on the expected profits from the
investment and adverse effect on long-term growth.
iii) Low inflation rates promote more investment. A stable inflation rate allows the
investors to invest in long-term having the assurance to have a secure future.
iv) Low inflation also prevents random redistribution of wealth and income. It protects
the lower strata of economy who don’t have coping mechanisms for abrupt inflation rate
changes.
v)
4. Income from assets owned overseas = 20% of 10% of GDP
=2% of GDP
Income from foreign countries asset in Gondor = 7% of 30% of GDP
= 2.1% of GDP
GNP = GDP + 2% of GDP - 2.1% of GDP
=99.9% of GDP
So, GDP is higher than GNP for kingdom Gondor.

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 Institute of Rural Management Anand
PGDM-RM42 – Term II – Mid Term Examination
< MACROECONOMICS>
<30th Jan, 2022>
<Anurag Sinha, Roll Number: P42008>

5. If the interest rates rise, the investors would no longer prefer the bond with a lower interest
rate, resulting in decline of its price. It can be illustrated by considering the following
example stated below –
Financial term Today One year later
Market interest rate 3% 4%
Coupon rate 3% 3%
Face value Rs. 1000 Rs. 1000
Maturity 10 years 9 years
Price Rs. 1000 Rs. 925
Yield to maturity 3% 4%

A detailed comparison can be seen between a bond of 3% with market rate as 3% in the
present year and rises by 1% the next year. The 3% bond will have to compete with the 4%
Treasury bonds. Thus, price of 3% bond is more likely to decline.

6. a) Applying the Tylor’s rule,

Interest rate = Long term real interest rate + Actual inflation rate + 0.5 ∗ (Actual inflation
rate − Targeted inflation rate) + 0.5 ∗ percentage gap between actual and potential GDP)

= 4% + 6% + 0.5*(6% - 5%) + 0.5 (0)

= 10.5%

b)

= 4% + 6% + 0.5*(6%-5%) + 0.5(-2%)

= 10.5% - 1%

= 9.5%

c) Yes, the government can guarantee that the economy will follow suit because in a
deflationary gap, interest rates will fall, causing investment to rise, shifting the AD curve to
the right (outward) and GDP to be reeled out.

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