MACROECONOMICS

FINAL EXAM

Marks 60

Duration 1hr 30mins

1. Which of the following statements is true about Say's law?

a. It states that supply creates its own demand.
b. It states that demand creates its own supply.
c. It states that total output will always exceed total spending.
d. It states that consumption spending is the most volatile component of
aggregate expenditures.
e. It is a major proposition of the Keynesian model.

2. Which of the following is under the domestic territory of India?

a. State bank of India in London
b. Google office in India
c. Office of Tata Motors in Australia
d. Russian embassy in India

3. The difference between nominal GDP and real GDP is that real
GDP a. Is larger than nominal GDP
b. measures the level of output including price changes, while nominal GDP
holds prices constant
c. measures the level of output and nominal GDP measures the price level
d. measures the level of output in constant prices, while nominal GDP
includes price changes

4. Which out of the following is included in National Income

estimation:
a. Old-age pension
b. Scholarship
c. Unemployment Fund
d. Subsidized Lunch at Office.
5. The difference between indirect tax and subsidy is known
as____________
a. Net Factor Income from Abroad
b. Capital Consumption Allowances
c. Depreciation
d. Net Indirect Tax.

6. GDP Deflator is equal to _____________

Nominal GDP /Real GDP × 100
b. Real GDP /Nominal GDP × 100
c. Nominal GNP /Real GNP × 100
d. Nominal NDP/ Real NDP × 100

7. If the Phillips Curve is vertical in the long run, then an increase in the money
supply from year to year will _______ the unemployment rate and will
_________inflation rate.

(a) increase; increase

(b) increase; not change
(c) not change; increase
(d) not change; not change

8. Which out of the following items will be included while calculating National
Income by the Expenditure Method:
(a) Royalty
(b) Intermediate consumption
(c) Net Exports
(d) Profit

9. If disposal income is $400 billion, autonomous consumption is $60 billion,

and MPC is 0.8, what is the level of saving?
a. $20 billion.
b. $210 billion.
c. $380 billion.
d. $590 billion.
10. The marginal propensity to consume (MPC) is the slope of the:
a. GDP curve.
b. disposable income curve.
c. consumption function.
d. autonomous consumption curve.

11. Demand-pull inflation is caused by ___________________, and cost-push

inflation is caused by ___________________.
a. an increase in aggregate demand; a decrease in aggregate supply
b. a decrease in aggregate supply; an increase in aggregate demand
c. a decrease in aggregate demand; an increase in aggregate supply
d. leveraged buyouts; government spending
e. oil embargoes; leveraged buyouts

12. One way that the government can increase aggregate demand is by
a. reducing government spending
b. reducing income taxes
c. increasing taxes
d. creating stagflation
e. reducing the economy's supply of labor
13. The upward-sloping segment of the aggregate supply curve
can be explained by a. downward sloping Aggregate demand
curve.
b. increases in the price level that raise profits, inducing firms to
produce more c. the full employment of resources
d. all of the above
e. a and b

14. In the aggregate demand and aggregate supply model, the intersection of
the AD and AS curves determines
a. the price level and real GDP
b. the equilibrium price and quantity combination
c. the difference between real and nominal GDP
d. the price level and the rate of inflation
e. the rate of economic growth

15. Cost-push inflation refers to an increase in the price level due to

a. an increase in aggregate expenditures
b. rising government spending due to national emergencies like
war or depression c. a shift to the right in the aggregate supply
curve
d. rising costs of critical inputs such as like energy, labor, and capital
e. excessive government spending

16. At the point where the disposable income line intersects the
consumption function, saving: a. equals consumption.
b. equals disposable income.
c. is less than zero.
d. is equal to zero.
17. Autonomous consumption is equal to the level of consumption
associated with: a. unstable disposable income.
b. positive disposable income.
c. zero disposable income.
d. negative disposable income.

18. The slope of the consumption function is called the:

a. autonomous consumption rate.
b. marginal consumption rate.
c. average propensity to consume.
d. marginal propensity to consume.

19. If your disposable personal income increases from $30,000 to $40,000 and
your savings increases from $2,000 to $4,000, your marginal propensity to save
(MPS) is:
a. 0.2.
b. 0.4.
c. 0.5.
d. 0.8.
e. 1.0.
20. The difference between indirect tax and subsidy is known as-------------
a. Net Factor Income from Abroad
b. Capital Consumption Allowances
c. Depreciation
d. Net Indirect Tax.

21. A situation when a person is able and willing to take up a job and gets
employed, it is called a. Employment
b. Full Employment
c. Under Employment
d. Unemployment.

22. Consider the graph given below. The consumption function is

a. 0.
b. 2+1Y
c. 1+1Y
d. 2+2Y
e. 1+2Y
23. The IS curve is negatively sloped because of :
a. low income levels
b. High price level
c. High interest rates
d. excess money supply

24. A decrease in autonomous planned investment spending, other things equal,

shifts the _____ curve to the ____
a. IS; right
b. IS ; left
c. LM; right
d. LM; left

25. Which of the following will cause the LM curve to shift right
(outwards)? a) A fall in lump sum income taxes
b) A fall in the price level
c) A fall in Money Supply
d) A fall in government expenditure

26. If Consumption function is C=10+0.5Y and Investment function is I=190-20r,

the IS equation is:
a. Y= 100-10r
b. Y=200-20r
c. y=400-40r
d. Y=0
27. If Money demand= 0.4Y-80r and Money Supply is 1200, LM
equation is: a. Y=200+3000r
b. Y= 3000+100r
c. Y=3000
d. Y=3000+200r

28. An __________________ monetary policy will imply income will rise and
rate of interest will fall.
a. Contractionary
b. countercyclical
c. Expansionary
d. None of the above

29.
When interest rates become so low that everyone believes the next change is
upwards, so that no one wishes to hold assets such as bonds, preferring to
hold money instead. This is known as:
a. Transactions demand for money
b. Money supply multiplier
c. Liquidity trap
d. Speculative demand for money

30. When there’s crowding out, expansionary fiscal policy fails to

stimulate the economy because _____________.
a. Government projects are never as productive as private ones b.
Government is utilizing resources that may already be productive
c. The need for expansionary fiscal policy signals a weak economy,
causing people to increase savings

d. Government projects tend to lag behind the current needs of the

economy

31. The nominal exchange rate of the dollar is best defined as the
number of units of the

a foreign currency that it takes to buy a dollar.

B foreign currency that it takes to buy a unit of U.S. goods.
C foreign currency that it takes to buy a unit of U.S. assets.
D foreign goods that it takes to buy a unit of U.S. goods.

32. Assuming a "one good economy," the number of foreign goods (i.e.
Japanese hamburgers) that can be obtained in exchange for one unit of
the domestic good (Canadian hamburgers) reflects the
a. price level in terms of the foreign price level.
b. trade deficit.
C. nominal exchange rate
d. real exchange rate.

33. Under a floating exchange rate system, an increase in U.S. imports of

Japanese goods will cause the demand schedule for Japanese yen to:
a. Increase, inducing a depreciation in the yen
b. Decrease, inducing a depreciation in the yen
c. Increase, inducing an appreciation in the yen
d. Decrease, inducing an appreciation in the yen

34. Other things the same, if the exchange rate changes from 0.6 pouds per
dollar to 8 pounds per dollar, then dollar
a. depreciates and that causes AD to shift right
b. depreciates and causes AD to shift left
c, appreciates and that causes AD to shift right
d.appreciates and that causes AD to shift left

35. According to the Mundell-Fleming model, under fixed exchange rates

expansionary fiscal policy causes income to _________, and under flexible
exchange rates expansionary fiscal policy causes income to __________.
A) increase; increase
B) increase; remain unchanged
C) remain unchanged; remain unchanged
D) remain unchanged; increase
Answer B
36. Demand-pull inflation is the result of
a. a rightward shift in the aggregate supply curve
b. an increase in taxes
c. a leftward shift in the aggregate demand curve
d. a rightward shift in the aggregate demand curve

37. Inflation occurs whenever

(a) the price level rises. (
b) the money supply increases.
(c) the price level rises continuously over a period of time.
(d) the price level falls continuously over a period of time.

38. The classical Aggregate Supply curve is:

a. Horizontal
b. Vertical
c. upward sloping
d. downward sloping

39. Soft peg exchange rate is when

a. Exchange rate is partly determined by the market and partly
by central bank b. hard peg exchange rate exists
c. Exchange rate is completely determined by the
market forces. d. all of the above

40. The limitation of IS- LM model is that

a. interest rate is constant
b. income is constant
c. Price level is constant
d. Investment is constant

Subjective questions:
A. Define the following: (2X5=10 marks)
1. Demonstration effect
2. Balance of trade
3. Fiscal policy
4. Cost push inflation
5. Supply shocks

B.

i) For an economy the following functions have been given: C = 100 + 0.8Y S =
-100 + 0.2Y I = 120 – 5r Ms = 120 Md = 0.2Y – 5r Find out (1) IS equation, (2)
LM equation, (3) equilibrium level of income and interest rate. (4marks)
ii) Given the following information about an economy, calculate net domestic
product at factor cost: (i) Gross domestic product at market prices = Rs. 12000
Crores (ii) depreciation = Rs.1500 Crores (iii) Subsidies = Rs. 300 Crores (iv)
Indirect taxes = Rs.1000. [2marks]
iii) Illustrate and explain a consumption and saving function. [4 marks]

C.

i) Calculate National income by income and expenditure method [6]

S. No. Particulars ₹ Crores

1. Compensation of employees 600

2. Government consumption expenditure 550

3. NFIFA -10

4. Net exports -15

5. Profit 400

6. NIT 60

7. Mixed income of self employed 350

8. Rent 200

9. Interest 310

10.Interest 200

11.Private final consumption expenditure 1000

12.NDKF 385

13.Depreciation 65

ii) Explain the Philips curve. [4]

D. Consider the following case Study:
An Empirical Test of the Mundell-Fleming Model: The Case of A Latin
American Country Yu Hsing
Joseph H. Miller Endowed Professor in Business, Professor of Economics,
Department of Management & Business Administration, College of
Business, Southeastern Louisiana University, Hammond, Louisiana 70402,
USA E-mail: yhsing@selu.edu

Chile’s authorities have engaged in fiscal policy, monetary policy and other
macroeconomic measures to stimulate or stabilize its economy. During the
global financial crisis, the Chilean government changed fiscal policy from a
government surplus of 3.934% of GDP in 2008 to a government deficit of
4.241% of GDP in 2009. As the economy continued to improve, the
deficit-to-GDP ratio declined to a low of 0.933% in 2018. Central government
debt as a percent of GDP also rose from 4.92% in 2008 to a high of 5.82% in
2009, and then continued to rise to 23.799% in 2018.These statistics suggest
that Chilean authorities have attempted to maintain fiscal discipline and meet
the standards of the government deficit-to-GDP ratio and debt-to-GDP ratio of
3% and 60%, respectively, as suggested by the EU. During the global financial
crisis, the Central Bank of Chile lowered the lending rate from 13.2618% in
2008 to 7.2506% in 2009 and 4.178% in 2018. M3 money supply rose 18.1321%
during 2007- 2008 to provide more liquidity to the banking and financial systems.
The Central Bank of Chile has pursued a floating exchange rate system and
allows market demand and supply to determine the peso exchange rate.
However, the Central Bank of Chile may intervene in the exchange rate market
in order to reduce unwarranted fluctuations of the peso exchange rate. To the
author’s knowledge, few of previous studies have examined the effects of
monetary policy and fiscal policy on output and the real exchange rate in Chile
within the framework of an extended Mundell-Fleming model. This paper
attempts to test if the predictions of the Mundell-Fleming model may apply to
Chile.

i) Explain the Mundell- Fleming model [2]

ii) What is the impact of an Expansionary monetary policy w.r.t. the Mundell-
Fleming model [4]
iii) Under a floating exchange rate regime what type of policy would be effective
and why? [4]