ae que” Unig SBCs a Niversity of Delhi i Introductory Macroeconomics ~ Economics M S May, 2016 Duration : 3 Hours Geter ee ks : 7: jruction for Candidates $37 105! | 1, All questions are to be attempted 2, Part (a) of each question is compulsory, : : re , (o) and (4), ‘The following data is giv. : _ Biven for an economy for the period 2014: (i) X purchases used car from ¥ for $ 20,000 and the d 2% fee each from X and Y aa (ii) The cost of providing public health is § 20 billion (ii) Change in inventory investment is § 5 billion (iv) A pays a market price of $ 100,000 to : purchase a new! house in the year 2014 nee (v) Government's cost of providing law & order services is $ 10 billion () Using Product approach to measure GDP, calculate the total contribution of the above economic activities to GDP for the year 2014? {). Isgovernment's contribution to GDP is measured at cost? Why or why not? (6) Answer Refer to Section 2.6.2 (a) Total contribution to GDP (i) 4% of $ 20,000 as dealer charges =$800 (ii) Cost of public health = $20 billion (iii) Change in inventory investment = $5 billion (iv) Market price of new house = $ 100,000 billion (v) Cost of law and order services = $ 10 billion 35000100800 = 35 billion, 100 thousand and 800. sre is no market Eat 12 tas thes ©) Government contribution is measured at cos wided by the Price for many of the goods and services pro y ,, Government. uss Expenditure approach to measure es Why na Jded and imports deducted in this approach! *t Refer to Section 2.6.3 re exports in a Scanned with CamScannerQ2 Introductory Macroeconomics (c) How is national savings estimated? Explain the uses of private savings. (5) Answer Refer to Sections 2.7.1 and 2.7.2 (4) (i) What is real interest rate? Given nominal interest rate of 10%, calculate expected real interest rate when the expected inflation is 4% and 5%. Answer (i) Refer to Section 2.12 Real interest rate (r) is real return to an asset. Nominal interest rate ({) is nominal return to an asset Real interest rate is Expected r= 10-4 = 6% Expected r= 10-5 =5% () Compute savings from the following data for an open economy (all figures are in billion dollars): Investment 100 Exports 50 Imports 40 Net factor payments from abroad 20 (+2) Answer (ii) Refer to Section 2.7 Saving, = Investment + NX + NFP = 100 + (50-40) + 20 = $ 130 billion 2. Part (a) is Compulsory. Do any 3 out of Parts (b), (e), (d) and (e). (a) The following financial market data is given for an economy: Currency = 1000; Reserves = 200; and Deposits = 2000 Calculate: () the reserve ratio (ii) size of the money multiplier (iii) monetary base, and (iv) the money supply. (4) Answer Refer to Chapter Section 5.3.5 (b) What are the social costs of a stead; it with unexpected inflation. Answer Refer toSection6.4 (©) @ Explain the determination of e demand curve for central bank and predictable inflation? Compare a quilibrium interest rate using the money and supply of central bank ined) in an economy with only deposits). How does a) increase in economy? Answer Refer to Sections 5.2.1, 5.2.2and 5.2.3 Scanned with CamScannerquestion Papers (i) The followi, “8 money demand function is given for an economy: Q3 3 M! = $Y (0.35 ~ i) and Y =$ 1000 Calcuate th. (6%) and o, = oe. demand, when the interest rate is 0.05 (5%), 0.06 642) and Plot the Corresponding money demand curve. answer Refer to Section 5,1 () When (i) When (ii) When = 1000 (0.35 - 0.05) = 1000 (0.30) = 300; 1000 (0.35 - 0.06) = 290 = 1000 (0.35 - 0.07) = 280 Money demand curve (M4) is downward sloping. (@ @ “Financial markets are in equilibrium when overall supply of money is equal to overall money demand”. In this context derive money multiplier and show that in equilibrium, the overall supply of money is equal to central bank money times the money multiplier. Answer Refer to Sections 5.3.2 and 5.3.5 Suppose the governments running a budget deficit equal to 20% of real income and decides to finance it through Seignorage, so deficit/ Y =Seignorage/Y =0.20. Suppose people hold real balances equal to 2 months of income, so (M/P)/Y = 2. ‘What should be the nominal money growth per month? (5+2) Answer Refer to Section 6.3.1 (ii oT 02 Y {Ps S22 ie = AMM x (M/P)/Y 0.2 =AM/Mx2 =02 AMM =02/2 =01 = 10% (i) Given M. Scanned with CamScanner& Introductory Mecroconoy, lics 4 o ye acto inancea large deficit through Seigno, . " (9 @ show apt wraation Dott Bigh and increase is ” araninghyperin‘lation- 3 tion 6. ‘Answer Refer toSect tax? Can inflation tax be equal to Seignorager (i) Whatis Inflation ‘Answer Refer toSection 6.3.2 3, Part (a) is Compulsory. Do any 3 out of Parts (b), (c) and (d) ang , (a) @) Distinguish between budget surplus and full employment bug : surplus. Which one isa better measure of direction/stance of fsey policy (ie) expansionary or contractionary)? Discuss, Answer Refer to Section 8.10 (i) Consider the following Keynesian model; Suppose full employment output (Y*) = 1000, Actual output y= 1100, Government purchase of goods and services (G) = 299 Transfers (TR) = 20 and Taxes = 0.20 Y (20%). Compute (a) actual budget surplus and (b) full employment budget surplus. (342) Answer Refer to Section 8.10 Actual BS = TA-G-TR = 0.20 (1100) - 200 - 20 20 (1000) - 200 - 20 = 200-200-290 =-20 Explai : nie Lo the interest rate works in the classical system to stabilize “Bete demand in the face of autonomous changes in componen’s of aggregate demand 5 suchas inv din Answer Refer toSections 7.6 estment or government spending, (ii) Deri ie !Scuve (ie. goods market equilibrium schedule). Explinhat determines thes ° iti lysis and diagrams) Pe Position ofthe IS curve? (Useforl oye Refer to: Section 9,2 Whatis extent terra Out? Discuss with a suitable diagram. Analyzes unemp| ma Out in case of: (a) fully employed a a Of fiscal expansion (©) unemployment with monetary accom © w Answer ow Scanned with CamScannerQuestion Papers = Answer Refer to Section 10.3 (i) Consider the following classical quantity theory of money MV =PY spaied DeEPIy (M) = 2000, Velocity of Money (V) = 3and Output (Y) = 3000. Derive aggregate demand curve from the above information and plot the price level and output ina diagram. (+2) answer Refer to Section 4.9 MV=py 2000 x 3 P x 3000 P=2 When output is 3000, P is 2 When output is 2000, P is 3 When output is 1500, P is 4 AD curveis obtained as follows: P ¥* (M= 2000) 3000 Y 1500 2000 @ @ Discuss the concept of Liquidity trap. Does monetary policy work in this case? Explain using diagrams, Answer Refer to Section 10.2.4 (i) Explain the concept of balanced budget multiplier? Answer Refer to Section 8.8.3 (iii) Consider the following Keynesian model of income determination; Consumption function C = 100 + 0.6Y, Investment I = 60. (2) What is the equilibrium level income? (©) If investment increases by 10, what would be the change in equilibrium level of income? (54342) Answer Refer to Chapter 11 Solved Illustration 23 @ Y =c4r or Y= 100+ 0.6Y +60 or 0.4 Y = 160 or ¥ = 400 Scanned with CamScannerIntroductory Macroccononmicg | ye (b) Y =C+I+Al or Y= 100406 + 60+10 or 04 Y= 170 or, 425 =25 i determination; { a re following IS LM model of Income “elennination: (©) Consider the " C = 100 + 0.8Y! ‘Consumption function 1 = 300 - 50! Investment function G = 600 Govt. purchases T =025Y Tax Function 20y — 251 Demand for money M = 800 Nominal money supply Price level i ha (here: Y4is disposable Income; Y is income and i is interest rate) Answer the following questions (i) Write down the equations for the IS and LM curve. Solve the system for equilibrium level of income and interest rate. (ii) Derive the values of Fiscal and Monetary Policy Multiplier? (iii) Compute the level of investment and budget surplus corres-ponding to equilibrium level of income? (iv) If government purchases are increased by 100, what shall be the change in equilibrium level of income? (4+3+2+1) Answer Refer to Chapter 11, Solved Illustration 23, © (i) Goods market equilibrium (I5): | AD = C+1+G | Y = 100+0.8 (Y-0.25 ¥) + 300 - 50/ + 600 = 100 + 0.8 (0.75 Y) + 900 - 50: or | . ~ ISequation ‘oney Market equilibrium (LM); O20Y ~ 25; . 800 O20Y = 409 4 25 Scanned with CamScannerQ7 question Papers orY = 2000+ 1257... LM equation Equilibrium: 2500-1254 = 2000 + 125i > fees 250 Y = 2000+ 125%2 = 2250 ii) FPM = ——Sc___ = 1.2: ay T+ kago7m 7? ba, = ©_ 25 ee as (iii) = 300 - 507 = 200 BS = 0.25 (2250) - 600 37.5 (iv) AY =AGx 1.25 AY = 100 x 1.25 = 125 Scanned with CamScannerIntroductory Macrog, Qs nome BCS University of Dethi Economics May, 2917 Introductory Macroeconom Instruction for Candidates 1. Allquestions are to be attempted | 2 Part (a) of each question is compulsory. | 1. Part (a) is Compulsory. Do any 2 out of Parts (b), (e) and (a). | a) Dierentite between intermediate and final goods. Under which ctegory | are ‘Capital Goods included? a Answer Refer to Section 2 why are goods and services included in GDP at their market values? Are te any disadvantages in using market values to measure production? | Discuss briefly. 6) Answer Refer to Section 2.1 fc) (i) Define ‘Private Savings: How are they used in the economy? (3) Answer Refer to Section 2.7.2 ii) In an economy, ‘Private Savings’ is 1065, Investment = 1346 and the Current Account Balance is negative (-220). How much is Government saving in this economy? (2) Solution: Refer to Section 2.7.2 | Given S_, = 1065 S = 14CA | 1346 = 1346 - 220 A = (- 220) S = 1126 S=S +5, 1126 = 1065 + 5 ym or 5... = 1126 - 1065 i Spe = 61 (@) (3) Whatare Official Reserve Transactions’ in the ‘Balance of Payments of country? 3) Answer Refer to Section 2.11.4 '9) 4 firm makes and sells jam using fruit it buys from another fit ml Scanned with CamScannery — question Papers a9 % 80,000. It pa ys its workers % 50,000; ces and has profits aPeana0e 850,000; pays 20,000 in taxes and has p1 What is its value added? ® cor Refer to Section 2.6.2 ans iver Fruits bought by other firm % 80,000 Wages paid to workers 50,000 “Taxes paid =% 20,000 Profit =% 40, 000 profit = Sales revenue ~ Wages paid — ‘Taxes — 40,000 = Sales revenue Sales revenue Intermediate Consumption 50,000 - 20,000 - 80,000 = 40000 + 50,000 + 20,000 + 80,000 = 190,000 ales - Intermediate Consumption = 190,000 - 80,000 or Valueadded =% 110,000 Value added (iii) A factory owner purchased old ones for & 60,000, Wh: pp? Solution: Refer to Section 2.6.1 Net impact on GDP = 5 x 30,000 = & 150,000 Sales of old machines will not be included. 5 new machines at 30,000 each, He sold his at is the net impact of these transactions on () 2, Part (a) is Compulsory. Do any three out of Parts (b), (©), (d) and (e). @) (i) What is meant by debt monetization’? @ Answer Refer to Section 6.6.1 (ii) Whatis the effect of an increase in expected inflation on demand for real money balances? Q Answer Refer to Section 6.3.1 ©) (i) Use the market for Central Bank Money to graphically illustrate and briefly explain the effects of an Open Market sale of bonds by the Central Bank on the equilibrium interest rate. (4) Answer Refer to Section 5.2 (ii) Define transactions velocity of money. Also, calculate it if the current value of transactions ina year is € 1500 crores and the money stock is %75 crores. @) Answer Refer to Section 4.1.1 Sven. Pr = & 1500 crores _ Scanned with CamScannertntroductory.Matcoesss cs = 8 75crores MV =PT Veo (©) (i) Assume, all money is held in the form of currency, and that Central Bank Moneys initially € 200 crores. fit pursues an expansionary Open Marie Operation worth 10 crores, what will be its impact on and the money demand and the money supply curves? itsbalance sheet (4) Answer Refer to Sections 5.2.5 and 5.3.5 (ii) Discuss the Cambridge version of the ‘Quanti ty Theory of Money’ When is it equivalent to the Fisher's version? @) Answer Refer to Sections 4.1.1 and 4.1.3 (4) (i) Assume that all individuals do not hold curren ratio (RVD) is 0.25. Also, assume that the m crore. Calculate the amount of: icy and that the reserve jonetary base equals & 300 @) (1) Reserves (2) Checkable deposits (3) The money supply (4) The money multiplier Answer Refer to Section 53.5 Given reserve satio (R/D) = 0; L H=C4r Since C=O. H=R Reserves = 300 - Checkable deposits = 300 x 4 = 1200 | Money supply = 300 x 4 = 1200 1 1 sae c+0(1-c) 0402500) 025 4. Money multiplier (m) = i) Briefly explain, what happens to the money multiplier when there = ‘nerease in the proportion of money people want to hold in curren — Scanned with CamScanner* Question Papers Qu Answer Refer to Section 5,3,5 (ce) Derive an algebraic express; mara prem easton for es demand for Central Bank money in (reserve deposit ratio), G, for Central Bank money, if the demand for cor: HO would the equilibrium interest rate change ‘Or Central Bank money increases? (7) 3, Part (a) is Compulsory. Do any three out of Parts (b), (ey (d) and (. (a) (Inthe Keynesian mo, to an increase in Comment. del, an increase in Government spending leads both consumption expenditure and savings. (5) Answer Refer to Section 8.8.2 (ii)_In the Classical model an increase in money supply leads to an increase in real output and price level. Comment. () Answer Refer to Section 7.8.3 (b) (i) Ilustrate, graphically, the determination of interest rate in the classical system. Explain what happens when there is a drop in autonomous investment demand. Does it reduce the overall demand in the economy? (5) Answer Refer to Sections 7.5 and 7.7 (ii) For a simple model of the expenditure sector with Government and income taxes, derive the expenditure multiplier and explain how it changes as the marginal propensity to save increases. 6) Answer Refer to Section 8.8.2 (0 @ Whatare ‘automatic stabilizers’? Give example. @) Answer Refer to Section 8.9 expenditure model, if total autonomous spending, ‘Ais 800, (ii) Ina simple .d the marginal tax rate t is 0.25, the marginal propensity to save is 0.2 an what is the equilibrium level of income? ® Answer Refer to Section 8.8.2 Given A580... £3073 ‘MPS = 0.2 o 1 - MPC = 02 or MPC = Scanned with CamScannerintroductory Macroeconomics Qn 1 ar 9 1 1 = 800+ paq 025) i y = 800 «79.8 (0.75) 1 y =800 7960 y = 800 y = 800° or Y = 2000 curve, How would you describe points above and below the Js (4) Answer Refer to Section 9.2.1 in with the help ofan IS-LM diagram. the impact of an increase in id + 7 the supply of money on thelevel ofincome and interest rate, (4) Answer Refer to Section 10.2.1 (ii) Assume the following IS-LM model: © Goods Market: Consumption (C) = 100 + 2 YD Investment (1) = 300 - 40 Government purchases (G) = 120 Taxes (TA) = W4Y Net Exports (NX) = (-20) where YDis disposable income Money Market: Real money supply (M/P) = 250 Money demnd (M‘) = 1/4Y- 100i (1) Derive the equations of the IS and LM curves. (2) Determine the equilibrium levels of income (¥) interest rate i. (3)_ What are the levels of consumption (C) and money demand (*) corresponding to equilibrium level of income? Scanned with CamScannerae ree oe Papers ete Qs gasver Refer to Chapter 11, Solved Illustration 24 ; gquations of the IS & LM Curve: IS function: Ye CeleGanx e 100 + 0.80 (Y ~ 9, SY) + 120 = 20 + 300 = 407 Y = 500 + 0.60 ¥ ~ 40 addy = 500 ~ 40; Y= 1250 1007 LM funetio = M* P Me we pt 025 Y~1005 250 = 0.25Y — 1001 = 1000 + 4007 2. Equilibrium level of Income (¥) and Interest rate (i) occurs where: IS = LM 1250 - 100i = 1000 + 400; & 1250 ~ 1000 = 400i + 1001 « 250 = 500i 250 ‘ 500 « i = 0.50 ud Y = 1250 - 100 x 0.50 Y = 1250 - 50 Y = 1200 } Level of Consumption (C) and Money demand (M‘) Corresponding to equilibrium level of Income (¥) is: ¥ = 1200, i = 0.50 Consumption (C) C= 100 + 0.80 (1200 - 0.25 x 1200) = 100 + 0.80 (900) 100 + 720 820 i ai Scanned with CamScanneree =. a - Introductory Macr, y CORO Qu COMOMicg Money Demand (M"): MM! = 0,25Y - 100i .25 x 1200 - 100 x 0.50 100 - 50 or M! = 250 (© (i) Explainhow output and employment are determined within th ‘macroeconomic model. Also discuss the impact of an increase participation in workforce on real wages, output and employ; classical in ‘Women ‘ment. (5) Answer Refer to Section 7.4.2 (ii) Suppose, we have an economy described by the following. equations; 4 Consumption Expenditure, C= 50+ = YD Investment Expenditure, I = 70 Government Expenditure, G = 200 ‘Transfer Payments, TR = 100 Tax rate, t= 0.20 ‘Where YD is disposable income. Calculate the equilibrium level ofincome and the budget surplus. Answer Refer to Chapter 11, Solved Illustration 25 IS equation: () Y=C+1+G6=5044 5 = 320+ der ~ tY + TR) YD + 70 + 200 m2), dev ~ 02Y + 100) a 4 = 320 + = x (8Y + 100) = 320 + O64Y + g9 = 400 + o6ay " Y - 064 x i BS “ Scanned with CamScannerQis syestion Papers ue 320 + 0.64Y + 80 = 400 + o.64y y - 0.64Y = 400 y = 400 _ 10000 0.36 ~ 9 BS =1Y-G_ TR = o2{ 00) ~ 200 ~ 100 Scanned with CamScannerQ16 a Introductory Macroecon ies cBCS University of Delhi Introductory Macroeconomics B.Com.(H) Economics-CBCS-GE-I, May, 2018 Maximum Marker Answer any five questions. All questions carry equal marks, 1. (a) Imagine an economy with only two business firms, XYZ Ltd, and ABC Ltd. directly to the public and rest to ABC Ltd, which prodi The year: ne z 2 exer 4. The XYZ Ltd. owns wheat farm. It sells some of its wheat Production luces and sells bread, following table shows the transactions of each business ding ¢ S.No. Particulars Amount () Wages paid to employees 60,000 ‘Tax paid to government 20,000 Revenue received from the sale of wheat : (i) Wheat sold to public 40,000 (ii) Wheat sold to ABC Ltd % 1,00,000 1,40,000 ABC Ltd Transactions ‘Wages paid to employees 40,000 Taxes paid to government 8,000 Wheat purchased from XYZ Ltd. 1,00,000 Revenue received from sale of bread 1,60,000 Calculate GDP, using product method. @) Answer Refer to Section 2.6.2 GDP using product method = 1,40,000 +- 60,000 =€2,00,000 GDP calculated at market price = €2,28,000 (b) (i) Calculate the money Stowth rate required to finance the budget deficit of & 10,000 in an economy. Given the following information: Income (Y) = 1,00,000 Nominal Money Supply (M) = & g0,000 Price Level (P) =%20 a Answer Refer to Section 6,3, Scanned with CamScannerquestion Papers 1 ==25 ot a ©. Money growth rate required is 2.5 (ii) What is Hyperinflation? (2) Answer Refer to Section 6.6.1 () Explain the effect of adverse supply shock on price level and output in the following conditions with suitable diagram: (i) When aggregate demand is held constant. Answer Refer to Section 7.9.2 (fig. 7.17) (ii) When aggregate demand can be increased. ” Answer Refer to Section 7.9.2 (fig, 7.18) 2. (a) Explain the components of current account of balance of payments, (3) Answer Refer to Section 2.11.2 (6) What happens to the equilibrium rate of interest in the following situations? Use suitable diagrm, (i) Decrease in nominal income (ii) Decrease in money supply. (5) Answer Refer to Sections 5.2.2 and 5.2.3 (©) (i) Define IS-curve. Explain its derivation graphically. @) Answer Refer to Sections 9.2.1 and 9.2.2 (ii) Explain the factors causing shift in IS-curve. Use suitable diagram. (4) Answer Refer to Section 9.2.6 3.(@) Briefly explain the following concepts: (i) Business fixed investment. Answer Refer to Section 2.6.3 A a dl Scanned with CamScannerIntroductory Macroeconomieg Qs (ii) GDP and GNP incl 2) bank in 2015 at some rate of interest to be J in 2016, During the course of the year actual inflation was paid in 2016. Du Who gained and who lost and cipated inflation. ; i d eas tela er exh stato : (i) when anticipated inflation is greater in both situa than actual inflation (ii) when anticipated inflation is less th Answer Referto Section 2.1 (point | (b) Rohit borrowed % 50 lakh from & (5) Answer Refer to Section 2.12 (i) If anticipated inflation is greater than actual inflation then lenders will gain and borrowers will loose. (ii) Ifanticipated inflation is less than actual inflation then lenders will loose and borrowers will gain. (c) (i) Explain the various stages in the monetary transmission mechanism, (4) Answer Refer to Section 10.2.3 (ii) How does increase in the money supply affect the price level and output in the long-run? Explain using AD and AS curves as per classical model. (@) Answer Refer to Section 7.8.3, 4. (a) Which of the following transactions are included in the calculation of India's GDP? Give reasons in support of your answer: (i) Interest on national debt. (ii) Commission charged by a real estate agent. Answer Refer to Section 2.1 (point 1) (3) (b) Given the following information: Quantity of money (M) = % 4,800 Nominal GDP = % 96,000 Real GDP = ¥ 48,000 (i) What is the price level and velocity of money in this country? (2) Answer Refer to Section 2.10.1 and 4.1 (i) GDP deflator = (96,000/48,000) x 100 = MV =PY = 4,800 V=96,000 “ V=20 200 = 2P (i.e., price is double) Scanned with CamScannerBE ll ee question Papers Quis (1 Suppose the velocity is constant and the economy's output rises by 20 Percent each year. What quantity of money and money supply should the central bank set next year if it wants to keep the price level stable? (3) answer Refer to Section 4.14 (i) Ain M=20% 4800 = 960 + M=4800 +960 = 5769 *, Money Supply = MV = 5760 x 20 = 1,15,200 (¢ Explain the effect of investment subsidy on equilibrium interest rate, consumption, investment and GDP. Use suitable: ‘diagram. Compare the results with other fiscal policy measures, ) answer Refer to Section 10.4.1, Fig, 10.7, 5.(@) Why are market values used to measure GDP? Explain with example. (3) Answer Refer to Section 2.1 (point 1) (b) Explain the determinants of the demand and supply of central bank money. (5) Answer Refer to Section 5.3.2 (©) Using the equilibrium condition in financial market (loanable funds), show the effect on equilibrium interest rate, national savings and investment in the following cases: (@ An increase in government purchases. (i) A decrease in amount of taxes. Use suitable diagram. ” Answer Refer to Section 7.6 & @) Use the following data to calculate private savings and government saving: GDP % 8,000 Net factor payment from abroad X-) 100 Consumption 2,500 Government purchase 1,500 Interest payment on government debt 250 Taxes = 2,800 Transfers 1,200 "ower Refer to Section 2.7.1 a = Scanned with CamScannerIntroductory Macroeconomics Q.20 Private Saving = Private Disposable Income ~ Consumption = (v4 TR- [+ NEP + INT) ~ © {8000 + 1200 — 2800 + (100) + 250} ~ 2500 = & 4059 Purchases vi Net Govt. income ~ Govt. “ees = i TR - INT} ~ G = [2800 1200 - 250) - 1500 =F -159 (deficit) i .d the Fisher equation, explain in detail b) Using the quantity theory of money an equ 4and6.2 ad curve using classical quantity equation? 8) Answer Refer to Sections 4.1.2, (©) (i) Derive the aggregate demar Answer Refer to Section 4.2 (i) Explain the role of multiplier in determining the slope of IS-curve, Use appropriate diagram. (4) Answer Refer to Section 9.2.4 fig. 9.3 7. (a) The following data i given for two years output and prices for an economy: 2011 2012 Commodities Price Output (kg) Price (%) —_ Output (kg) A 10 60 16 100 B 6 80 12 140 Calculate the Nominal GDP, Real GDP and GDP deflator taking 2011 as base year. @) Answer Refer to Sections 2.8.4 and 2.10.1 Nominal GDP (2012) = 16 x 100 + 12 x 140 = 3280 Real GDP (2012) = 10x 100 +6 x 140 = 1840 Nominal GDP (2011) = 10 x 60 + 6 x 80 = 1080 GDP Deflator (2012) = (Nominal GDP/Real GDP) x 100 = 2280 , 100=17826 1840 (b) State and explain various costs of hyperinflation in an economy. (6) Answer Refer to Section 6.6.3 (0) Given the following information: Consamplicn C =360 + 0.80Y d; Yd =Y-T Investment 1= 640 - 61 Scanned with CamScannerquestion Papers Q21 Government expenditure G= 160 Tax T=200 Price levei Bas Nominal Money Supply M= 1200 Demand for money L=0.2Y -4i Full employment level of income Y % 4,700 @ Compute the bah af Moaitury shi Pacal policy multipliers. Answer Refer to Sections 11.1 page 11.42 (i IS equation : ¥ = 5000 — 39; L equation : ¥ = 2000 + 20; Solving for i and ¥, we get: i= 60 and Y= 3200 hag Fiscal policy multiplier tte _— inka, 4 4x5 © 4¥02x6x5 =2 Monetary policy multiplier = —P _ 6x5 44+02x6x5 =3 Gi) Compute the increase in the nominal supply of money required to achieve full employment, Answer Refer to Sections 11.1 page 11.42 (ii) LM equation: Y = 2000 + 204, for y,= 4700 L=02Y-4i L =0.2 x 4700-4x 60 L =700 L = M/P = Lb =M(Y)P Ce ~ Scanned with CamScannerQ2 Introductory Macroeconomicg => 700 = M(¥)/3 => M(Y) = 2100 -: Change in money supply = 2100 - 1200 = 900 ment expenditure required to achieve (iii) Compute the increase in gover™ G22) full employment. Answer Refer to Sections 11.1 page 11.42 (ii) Y = 200 + 0.8Y + 640 - 61 + G(Y,) => 02Y = 840 - 360+ G(Y) or G(¥) = 460 . AG = 460 - 160 = 300 Scanned with CamScannerQuestion Papers 02 cBCS University of Delhi Introductory Macroeconomics-II B.Com.(H) Economics-CBCS, May, 2019 Alll questions are to be attempted. Part A of each question is compulsory. 1, Part A is compulsory. Do any two out of Parts B, C and D: (A) From the following information, calculate GDR, Private Disposable Income and Private Savings : (2,21) Consumption 4,500 Compensation of Employees 6,300 Rental income of Persons 600 Proprietor’s Income 900 Corporate Profits 700 Net Interest 400 Indirect Business ‘Taxes 500 Consumption of fixed capital 1,000 ‘Transfers received from Government 350 Interest Payment on Government Debt 200 Direct Taxes 700 Answer Refer to Section 2.7 Solution: (A) GDP is calculated by adding: Compensation ofEmployees = 6,300 Rental Income of Persons = 600 Proprietor’s Income = 900 Corporate Profits = 700 Net Interest = 400 Indirect Business Taxes = 500 i Scanned with CamScannerel Becatill Q24 Introductory Macroeconomics A ital= 1,000 sumption of Fixed Capital SS ° 10,400 = 2 y+ TR+INT-T vate Disposable Income Private Disposable srso0 + 350+ 200-700 10,250 Private Disposable Income - Consumption Private Savings 10,250 - 4,500 5750 nflation is 6%, calculate the real rate of return face value of % 300, available for purchase at (B) (i) If expected rate of i ona | year bond of % 250. (2) (ii) How does the official settlement balance ensure that the “Fundamental Balance of Payments Identity” holds ? (3) Answer (i) Refer to Section 5.2.5, Solution: Promised Payment - Price of Bond Price of Bond (i) Nominal Rate of Return = 300 ~ 250 = =2 250 20% Real Rate of Return Nominal Return - Inflation 20-6 = 14% Answer (ii) Refer to Section 2.11 0 (C) How can National Savings, Private Savi , ' be calculated ? What will ha ings and Government Savings pen if Government Deficit increases ? (5) Answer Refer to Section 2.7 Answer Refer to Section 2.10 (@) With the help of data given belovs for each * calculate the rate of inflation Year from 2014 to 2017 considering 2013 as base: (2) Scanned with CamScannerbis QL ————— Question Papers Qa Year Pt 2013 60.0 2014 615 2015 65.0 2016 645 2017 66.0 Answer Refer to Section 2.10.2 Solution 2: (8) CPL fails to take into account quality improvement in goods and services. 1 (For the year 2014 = 2) % 60 65-60 _ 6 5a, (ii) For the year 2015 = (iii) For the year 2016 = 66-60 (iv) For the year 2017 = —>— = 10% 2. Part A is compulsory. Do any three out of parts B,C, D and E : (A) (i) Do you agree with the statement that ‘bond prices and rate of interest are negatively related’ ? Give reasons for your answer. (2) Answer Refer to Section 5.2.5 (i) Calculate real interest rate given that rate of growth of real GDP is 7%, nominal interest rate is 14% and money supply increases at 16% per year. Q) Answer Refer to Section 4.1.4 Solution: (ii) % change in M + % change in V = % change in P + % change in ¥ or 16+V=P+7 P=9% (since V = 0) Real Rate of Interest = Nominal Rate of Interest - Inflation Rate 14-9 5% Scanned with CamScanneros Introductory Macroeconom, . ics (B) Explain the concept and causes of Hyperinflation ? Sug, ‘ BESt lic, that the government can use to control Hyperinflation, es 7 Answer Refer to Sections 6.6.1, 6.6.4, 6.6.5 and 6.6.6. (C)_ What is High Powered Money ? To what extent does High Powe Money affect the Money Supply in an economy ? ss Answer Refer to Section 5.3.5, (D) (i Given the Quantity Theory of Money, assume that income is 1000 units and money supply is 400 units. Also assume that y circulation of money is 5. Calculate the aggregate price le will happen to the price level if money supply rises to 6t locity of vel. What 00 units ? Explain, 4 Answer Refer to Section 4.1.2 Sol: (i) Given : Income = 1,000, Money Supply = 400, V = 5 MV = PY «from QTM $400 x 5 = Px 1,000 ee oo) If money supply rises to 600, then: MV = PY °. 600 x5 = Px 1,000 => (di) How are the costs of expected inflation different from the costs of unexpected inflation ? 3 Answer Refer to Section 6.4 (E) (#) Explain the statement that ‘financi can only lead to high inflation’ Answer Refer to Section 6.3.2 ing a large deficit with seigniorage 4 @ With constant levels of velocity of money and GDP, the government raises money supply by 5%, Assuming a real rate of interest of 8%, calculate the nominal rate of interest, a, Answer Refer to Section 4.1.4 Solution: — Given: V= constant GDP = constant Scanned with CamScannerQuestion Papers Q7 Money supply rises by = 5% Real rate of interest = 8% From Quantity theory of money, we have: % Ain M+ % Ain AinP+%Ain¥ or 5 +zero=% P +z0r0 % A in P or inflation rate = 5% We know: Real Rate of Interest = Nominal Rate of Interest ~ Inflation Rate '. 8% = Nominal Rate of Interest - 5% => Nominal Rate of Interest = 13% 3. Part A is compulsory. Do any three out of parts B,C, D and E: (A) (i) How does an increase in autonomous spending affect the equilibrium level of income ? Explain using IS-LM analysis. (3) Answer Refer to Section 9.5 (ii) What is the relevance of Okun’s law ? (2) Answer Refer to Section 7.9.2 (B) (i) Suppose that in an economy = 100 +08 ¥, T=7 G = 200 TR = 150 t= 0.20 (a) Calculate the equilibrium level of income and multiplier in this model. (b) Calculate the budget surplus. (c) What will be the new equilibrium income and the new multiplier if t increases to 0.25 ? 22,1 (ii) Derive the balanced budget multiplier. 3) (iii) Under what circumstances can the LM curve a horizontal ? Use suitable diagram to explain. Q) Answer (B) Refer to chapter 8 Scanned with CamScannerIntroductory MACTOeCONOMics Q.26 (B) Explain the concep’ that the government can Us Hyperinflation ? Suggest policies of 7 and causes OF HYP erinflation. 7 e to con 6.5 and 6.6.6. To what extent does High Powered conomy ? a Refer to Sections 6.6.1, 6.6.4 6. Money ? Supply in an € Answer (©) What is High Powered Money affect the Money Answer Refer to Section 5.3.5 (©) (i) Given the Quantity Theory of Money, assume that income is 1000 i units. Also assume that velocity of unis and mene HP te the aggregate price level. What will happen to the price level if money supply rises to 600 ue Explain. Answer Refer to Section 4.1.2 Sol: (i) Given: Income = 1,000, Money Supply = 400, V=5 MV = PY .» from QTM -. 400 x5 = Px 1,000 ad pe 2,000 =2 1,000 If money supply rises to 600, then: MV = PY <- 600 x 5 = Px 1,000 = p= 3000 1,000 (ii) How are the costs of, expected inflati unexpected inflation ? Answer Refer to Section 6,4 ion different from the costs of 3 can only lead to high inflation’ Bm i (E) (i) Explain the statement that ‘financing a large deficit with seigniorage Answer Refer to Section 6,3, i Answer Refer to Section 4.1.4 Solution: — Given; y= constant GDP = constant Scanned with CamScanner‘Question Papers Money supply rises by = 5% Real rate of interest = 8% From Quantity theory of money, we have: % Ain M+% Ain V=% Ain PY %A in Y or S+zero=% Ain P + zero + % Ain Por inflation rate = 5% We know: Real Rate of Interest = Nominal Rate of Interest - Inflation Rate ++ 8% = Nominal Rate of Interest - 5% => Nominal Rate of Interest = 13% 3. Part A is compulsory. Do any three out of parts B, C, D and E: (A) (i) How does an increase in autonomous spending affect the equilibrium level of income ? Explain using IS-LM analysis. (3) Answer Refer to Section 9.5 (ii) What is the relevance of Okun's law ? (2) Answer Refer to Section 7.9.2 (B) (i Suppose that in an economy C= 100+08 ¥, T=70 G = 200 TR = 150 t= 0.20 : (a) Calculate the equilibrium level of income and multiplier in this model. (b) Calculate the budget surplus. (c) What will be the new equilibrium income and the new multiplier if t increases to 0.25 ? 22,1 (ii) Derive the balanced budget multiplier. (@) (i) Under what circumstances can the LM curve be horizontal ? Use suitable diagram to explain. (2) ‘Answer (B) Refer to chapter 8 Scanned with CamScannerUC” oa Introductory Macroeconomics ye CHinG commenti) Vat Y © 100 +0.8(Y- T+ TR) +70 +200 Y © 370+0.8 (Y - 0.20Y + 150) = =28 0.20) 0.36 () BS =ty-G-TR .20 x 1361 - 200 - 150 78 (©) If t =0.25, then: Y =370 + 0.8(Y-0,25Y + 150) 490 4 . Y =1225 1 © 1-08 (1-025) 1 L 1-0.8(0.75) 0.4 (ii) Balanced Budget Multiplier = 1 (since ATA = AG = AY) Refer to Section 10.2.1 (point 1) (©) (i) Given that in an economy: C =080-ny t =025 T= 900 - 50; G = 800 L=0.25Y ~ 62.5) (MIP) = 500 (a) ‘Derive the equation for the 1 curve, () Derive the equation for the LM curve, Scanned with CamScannerQuestion Papers Q29 (c) What are the equilibrium levels of income and the interest rate? 222 Answer Refer to Page 11.4.3 Solution: (i) Yy C+HleG seeedS equation Y = 0.8(1-0.25)¥ + (900 ~ 50i) + 800 or 7 4250 ~ 125i M Fore EM quation 500 = 0.25 ¥- 62.5% or Y = 2,000+ 250i Is = 1M jn equilibrium 4250-1251 = 2,000 +2501 : i = 6% Subsitituting value of iin IS or LM equation, we get: Y = 4250-125x6 Y = 3,500 (ii) Explain policy mix. What is its significance ? Explain using suitable diagram. 4 ‘Answer Refer to Section 10.4.2 (D) Explain the following using suitable diagrams : (i) Show that both government spending and the tax rate affect t IS schedule. the 3 Answer Refer to Sections 9.2.5 and 9.2.6 (ii) How will an increase in real money stock affect equilibrium income and equilibrium interest rate ? Explain using IS-LM analysis. 3 ‘Answer Refer to Section 934 (iiyin the context of fiscal policy what is crowding out ? How does the liquidity trap affect crowding out ? 4 Answer Refer to Sections 10.3.1, 10.3.2, 10.3.3 (Point 1) cy options, one of an investment subsidy and (E) (i) Consider two poli ; another of a rise in income tax ratés. Using the IS-LM model, discuss the impact of these policies on income, interest rates and 5 investment. ‘Answer Refer to Section 10.4.1 Scanned with CamScannerIntroductory Macroeconomics Qn ase theeffect of monetary policy different from the effect of a (a Ho Be ne a tool of stabilization ? Explain using suitable diagram. 5 Answer Refer to Section 104.1 Scanned with CamScanner