. t •ncreases th ere is ......... ... in aggregate expen diture.

(increase/dee
2. When mvestmen 1 , . . reasei
·c .· ht when there 1s ....... ... ... .. m autono mous aggregate expend
3. IS curve sI111ts to 11g itu
. re.
(increase/deer
ease)
.
4. LM curve shifts when . •••· · · · · · · · · · · change s (mone y supply /mone y d
· ernand)
5. IS curve is derived from equilibrium in ......... ......... market. (product/money)
• .eases, th e LM curve shifts to •••· · · · · · · · · · · · · ·
6. If money supp ly mc1 (left)r'1ght)
. .
7. If aggregate ex pen d1ture mcreases , the IS curve shifts to . . . . .. .. .. .. . . .. . (left/ri h)
gt
• • ·
Ans. 1. mdirect, 2. mcrease, . 3 increas e 4. money supply , 5. produ ct, 6. right, 7. right.
,
, (iii) State whether the following statements are True or False:
1. IS- LM curve determines equilibrium in produ ct and money marke t.
(True /False)
2. IS -LM analysis is also known as Hicks-Hansen synthesis. (True /False)
~ 1
3. IS curve represents financial sector of the economy. (True /False)
~ .. 4. LM curve represents monetary sector of the economy.
(True /False)
5. LM curve is derived from money market equilibrium.
(True /False)
6. In the derivation ofLM curve, money supply is taken as consta nt.
(True/False)
7. Equilibrium interest rate is determined where IS= LM.
(True/False)
8. There cannot be disequilibrium between money and produ ct marke t.
(True/False)
9. Aggregate demand curve can be derived from IS -LM frame work.
(True/False)
Ans. 1. True, 2. True, 3. False, 4. True, 5. True, 6. True, 7. True, 8. False, 9. True.
I 11. Short Answer Type Questions
l. Define IS curve.
2. What is investment demand function?
3. Define LM curve.
4. What causes IS curve to shift?
5. How is IS curve affected b the c .
6. How is LM curve derive d/ hange m aggreg ate expen diture ?
7. Write a short note on the slope of LM
8. What causes LM curve to shift? curve.
9. What does disequil'b . .
. l num m the produ ct a d
10. Define real balances. n money marke t indica te?
11. Define rate of interest.
12. What causes aggregate de d
. man curve to shift;>
13. Ment10n the factors that are . ·
responsible for d
14. What happens to the LM curve wh ownw ard slope of AD curve.
en money dema nd increases?
186
I L Oblective Type Questions
t (i) Choose the correct answer from the given alternatives:
. ,~
n , of the foJJowin g cond itio n , d e rivation of AD c u rve thro ug h IS-LM
, r wh j"h
l (Jd
p•1•Hihl<:? lllod,1;1
<:-tJ Al) ,Jw t}w dk< t 1Jf d1iJrig-,:~ in pri<T lc: vd <HI LM cu rvc.
(I J) AJJ ,J w 11,,. di<:<1 ,>f d ii-.tngc~ in pr i<.< '. k vd <HI JS c. ur vt:
(c,J Al l,JW I lw dkct , Jf, JJ ,,JT1g<:"i in q1J ,-JfJ 1it y o f' rn<m <.:y on J,M c u r ve

(d) ;\J mw ,)f tlw i-.t lJCJ V<·

~- SJopc of AU c urve dc pe nd Ron :
(;J) ·)J,Jp1: of JS <, tJJ v<: (I, ) slo p e o f J,M c ur vt:
<, J ·~l()p,: ,Jf JS i-.tnd J,M <' tJJ" V<'.S (d ) 11<>1 1<..: o f th e abov e
:',. Whj ch of th e foll owing iHthe formula to estimate mone tary policy multiplier?
!\ M h ~y
<>! A( ~) (b ) t.(~;' J
('-) Ar;,J /\ Y
(d ) Non e o f th e a bove

4. FiHcal pol icy multipJj c r i H:

/\ y (h) 6C
(~)
/\C 6Y
y
( (.) (d) No n e of th e a bove
(;
5. Whic h of' Ua: fi Jll ow in g iis th <.; n a l- Ur'....' <>f' J., 11'V\.
AS c u rve ?
(a ) J lori:mn ta l (b) Ve rti cal
(c ) O<>w n war<l ~lopin g- (d ) No n e of' th e a bove
An H. I . (a),~- (c), :1. (b), 1 . (a) , r., , (h).
t (II) FIii in the blanks with appropriate word Irom th e words given in bracket:
J. /\ g g re g-a f(' ck rn a nd is a fun ctio n o f .... . . (mo n ey s upp ly/ price le~l
2. •••••••., ... a pp . .
roac hes ar c Lhc re l o . 1 • • · ·•· · · · · · · · · ·
. u<.. 11 vc AD c urve. (Twoffhrt'
3. AO, ur vcs l11f1 s d1 a : 1o facto rs· (->th c. ,. t nL a n
(price leve l/rare of inLt'fl"
4. Wit Ji jJJ( ri •;1sc in III OIH:y supr>ly l M . ' . . . ·.· ·.. . ...... .
•c ur vcs hi h s . ..... .. . . . ...
J
(ri g hL warcVlefl \v ~ir

194
f'

(~ ,) I' : 1.~ ;i l'( •s 11h nr

d1 an . . go ve rn . ·, _
( :11 . 111 ) '. " I ll I
('; if . gt: Jn · r.<..: Js ca1led
rn en tc xp en di tu
!,. I . 1· • .. .. .. . .. . .. ..
11 p l( T
I'" / 11 , · 11 111 (moneLary/fiscal)
. pr ic c le; vd ' A •
r·J.'i cal.
• _ 1<c· l(' vc·l,'.d . ' lw o , :1 .,. . nghtw·1c1·d , r:
,, •
1 111
;\ flS,
whether the fallowing statements are 1irue or False:
(Ill) stat
e
.,. . rv e
i1ltn1 11 11 si 11g IS -l .M t ur v<:: an al ys is 'w e <.: an no t d e riv,JA
~
O cu
(True/False)
' 1. W . . ·
pa r
.
11 a ry 111011c1
a ry po lj cy sh in s· LM <.:urvc to ng ht . (True/False)
2. •
1:x 1s 10
...
1 w he re A D = SRAS th e ec on om y is m sh or t ru n equilibrium. (True/False)
3. /\ I I he po i11
. ' d
. rm · t'
si an M od el 1s a Jo ng ru n in co m e de te ma Jon mo · el · (True/False)
4 . Key ne
. · I ti· p 1·1e r m ea su re s th e ch a ng e ·m rea J G DP du e to the chan ge
I rn u
5. M o ne ta ry po icy
. (True/False)
.
m re al m on ey su pp ly
e.
T ru e, 4. False, 5. T ru
.
I◄ al se , 2. T ru e, 3.
A ns . · 1.
ions
I 11. Short Answer Type Quest
e de m an d.
I. Def in e ag gr eg at curve?
on et ar y po lic y ca uses a shift in the A D
th e m
2. H ow ch an ge s in e?
sc al po li cy ca us es a shift in th e A D curv
th e fi
3. H ow ch an ge s in lie r?
yo u m ea n by m on et ar y policy m ul tip
4. W ha t do
ie r?
do yo u m ea n by fiscal po li cy m ul ti pl
5. W ha t
stions
I 111. Long Answer Type Que an d cu rv e.
.
m od el , de ri ve th e ag gr eg at e de m
h eg at e de m an d curve.,, Exp lam.
I. Usi n g IS -L M . h.1fl
t t e ag gr
fis ca l po hc y ca ns curve shifts?
2. "A ch a ng e in th e m
on et ar y o r
d of in te re st when AD
.. . te ·
en s to eq u1 hb nu m real G D P an ra Il l
3. W h a t ha pp
m od el .
th e sh or t ru n an d lo ng ru n IS -L M
4. E x pl ai n
--
 KEY POINTS
· th eeconomy
ices demanded b"J.1 all thep eOr,-hLezn
emand : ft refe.rs to the total quantity ofgoo.ds and sero
regate D h b' . i-r 1
whicl,,. the k t d th e
, goods mar e an
com znatwns o1 price level and real GDP at
st e
9 ,.1gg ,g1.ve1.1 p,·ic,e leve l. It show . .. .
ilibr ium .
·
11
t1l a -' .1 et are simu ltan eou sly in equ .
that all the firms in the economy are
. .
111()//f' )' Jlla1 ll
rs to t~e tota l qua ntity of goo ds a~d se~z ces
, A g;egate supply: It ref~ and serv ices
l. It expr esse s the relationship between the quantity ofgoods
0 ~ ding to prod uce at a give n pric e leve
111
e,I, ced and supplied on one• hand and pric . . .
e level on the other.•
rmined
/JfO~ II ,
Out put and Pric e Lev el: The equ ilibr ium level of output (real GDP) and price level is dete
E uilibrium
© /t1,epoint where AD = AS. This is called
the point of macroeconomic equilibrium .
ight line
v~: Sho rt run _AS curo e is kno wn _as Keynesian. AS curve is a horizontal stra
t Run AS Cur
0 Shor run, AS zs perfectly responsive to the AD.
indicates, if all the prices are fzxed zn the short derived after
AS Cur ve: Lon g run AS curo e, kno wn as classica l AS curve, is a vertical straight line
0 Long Run In this case, level
having full adjustment of excess labour supply
and shortage of labour through wage flexibility.
of output is independen t of the price level.
on Out put and Pric es: A shif t in AD curv e due to the changes in money supply causes the
0 Impact of AD shif t and prices to rise
of outp ut and pric es to cha nge . A righ twa rd shift in the AD curve causes output (real GDP)
level
es to fall.
and a backward shift causes real GDP and pric factor
t on Out put and Pri ces: A shif t in the AS curve due Lo change in the input prices and
0 Impact of AS shif es real GDP to
to change. Rightward shift of the AS curve caus
productivity causes the leve l of output and prices e causes output to fall and price level to rise .
l to fall .A back war d shif t in the AS curv
rise and price leve line), a
t in case of Key nes ian AS Cur ve: In case of Keynesian AS curve (horizon tal straight
0 Effect of AD shif
e caus es outp ut leve l to rise and a back war d shift causes the level of output tof all, price
fonuard shift in AD curv
level remains constant. tical st_raight line), a
AS Curve: In case of classi~a~ AS curve (ver
0 Effect of AD Shift in Case of Cla ssical e level to fall,
ard shift in the AD curv e caus es pric e leve l to rise and a backward shift in A D curve causes pric
fonu
level of real GDP remains constant. run, leve l of tota l output is dete~ined by theAS curve and
price level is
in the Lon g Run : In the long and
use of_ economic gr~wth ca~es output level _to rise in
0 AD and AS
AD curv e. A righ twar d s~ift in AS c~ro e beca
determined by increase
rise. In case ofsimultaneous increase in AS and AD,
arightward shift ofA D curve causes price ~evel to . , . .
the price level is less as compared to only inc~ ease zn A D. ,
omis ts know n as supply sz~e rs are of the opinion that cut in the tax rate
Eco nom ics: A grou p of econ ulant 1r.or th e
0 Supply Side
. I t upp ly in the econ omy . Because, a cut in the tax rate works as a stim
wz.11 increase t ie aggrega e s
workers to work more.
EXERCISE

I 1. Obiective Type Questions

given alternatives:
, (i) Choose the correct answer from the

1. AD cur ve sho ws: g d

. . n of price level and real GD P at which oo s mar k l 15. . . .
rium
(a) cor nbi nau o wh· h e in equ ilib
. . tion of pric e leve l a nd real GD P at · ic mo ney k . .
(b) cor nbi n,i . ma r et IS m equ ilib riu m
. 0 . 1tion ofp n ce leve l and real GD P at h . bot h .
W ICh
(c) corn b • ~ . . . . .
goo ds mar ket and mo n ey m ·
. l l'ine ous ly are m equ1hbnum ark er
s1n1u '
f the above
(d) non e o

205 ■
 2 . Sho r t ru n AS c urve is:
( ;1) I i p w,1rd 1-, Jopin g
(b) l)
O¾ n¾a rd ~lop in g
(<) V('t tic .-1I 1., 1r a iCfh t line: (cl ) "·r
,., •~ ) ne f h b
o t e a ov e
3. Wh i c h of the folJ owin g fact or cau ses SRAS
curv e to shift?
(a) Ch ang es in GDP lc;ve l (b) Cha nge s in price leve l
(<) Cha nge'> in fact or pro duc ti vity
(d ) Non e of th e abov e
4. Wh at is the natu re of clas sica l AS curv
e?
(a) Upw.-1 rd slopin g
(b) Dow nwa rd slop•in g
(<.:) Vertical stra igh t line
(d ) No ne of th e above
5. At the mac roec ono mic equ ilibr ium poin
t, whi ch of the follo win g cond ition s are satisfied:
(a) Sim ulta neo us equ ilibr ium of mon c:y and
goo ds m a rke t
(h) Pro duce rs must prod u rc t Ii (' prC'vailing le
ve l of nati o nal outp ut at th e give n price icl l'i
(c) Both (a) and (b)
(<l) Non e or th e ;1hov<.:
Ans . I. (<.:), ~- (a), ~- (r), 4. (c), 5. (c).

• (ii) Fill in the blanks with appropriate word from the

words given in bracket:
I. Lon g run GDP is .... ...... .. .. .. GDP of the econ
omy. (act ual/po1cn1 i.il 1
2. T here arc ... .. ...... . wa ys to increase GDP k:vel
in the eco nom y. (two/11 11 r r l
3. Sup ply side eco nom i cs give emp hasi
s on ...... ... ...... l o inc rease AS in rh e economy
.
(inc rease in Lax rate/ increase in!\[) i
4. Int I1c Iong nm , tota I outp uus
· d ete rmm
· e db y ...... .... ..... . (AS curvc/AD c11 1H 1
5. Shift in supp l y curve to le ft caus ing rise in pric
e leve l is kn o,,·n as .... .. .. ...... .... · .
(in fl ;nio n/stagOa11011
Ans . I. pote ntial. 2. r hree , 3. incr ease.: in lax
rate , 4. AS c urve , 5. stag fl aLio n.
• (ill) State whether the following statements are True
or False:
t. Sho r r r11n rcp1ilibrium in th e eco 110111 y (True /false )
m ay occ ur al ong with so me GDP ga p.
2. CD P kvt l in thl' econ omy m tly increase du e (True /fabel
LO tem po ra ry in crea se in AS .
3. LARS i~ ,dso kno wn as classirn l sup ply curv e. (True /Fabel
traW-•l
4. Kcy ncsim1AS c-urve is a vertical su·aigln (True t•
lin e.
. d
5. (:lu nge s in f,u:tor pro uct1v . .tl )' ca nno t co ns1'd (True / f aJstl
ere cl a'- a reaso n of supn
r h ~hoc k
Ans . l . T uaf•. 2 . Ti He. 3. Tru e. 4. False. 5. False
.

II 206
~
 \ ~ / KEY POINTS
. .
" '
~ L ~ •
,._

.
0 Jn fl a tw n : .~1 .' 1.·, Hl1 11·rn rp
c 0'J nsisl t> lll a n d a /JjJrecia ble ·,-i.~
0 nvo P rW. C l•p IR a soi, s +1 n n a t • . . •
e in th e g en er a l
, jJ rice lev el L~ /m o
. . a e 0 io 11: (1 ) O ycltc a. . .. wn, .
h E
0 Fis .e r qu a t_. • On e-to-on 'J J • l m 1. ,.m ployrnent, (u) suJ;J .
• L\ otjl, 11, 111,.
. . w 11 • e re la ti on sh ip betwee . . Jly shock5,
n in jl a .t w n a n d rate .
lt 1s 1on tt e11 as : o f in terest 1.s. exp ni
ssed l)'\J ,... 1
l'L\ 1e1 r, ,
·J
H t>re, ,. . _. Expected r' = i - 1 { 11111,,,,,
rea l interest rate;
0 L iqu id ity Eff ec i: N o m in a l intere
t : It refers to th e st ra te; w: Expec
e f ec t o ted rate o f in flat
0 Inco me E ff ec t: f increase in mon ion.
It shows th e e ffect ey s~tpply on th e ra
o ffa ll in th e n o m te o f interest.
mon ey supply . .i-na l rate o f intere
0
st on ou tp ut a n d
Fis h er E ff ect/ E incmne becan~e oj gr
x-pe ct a ti o n E ff owll,,,
rate. It shows the ec t: It provides 1
-impact o f inflatio ~n e- to-one re_lat-ior_is
0 R ea l B a la n ce a na1y expectations hip betwee~ inflation
n d In te re st R a te o n n o m in a l in te and no min al inl,•rr
R el a ti o n sh ip : D em a re st ra te in th e long n m . 1
intiersely related. n d fo r real ba lanc
0 Soci a l Costs o f e a n d the nominal
In fl at io n : Social rate of inlem/ arr
different. Social co costs o f peifectly
st o f peifectly anti anticipated in fl a
rela tive price vari cipated in fl a ti o n ti o n a n d impe1fec
ability, (iv) Ta x di includes : (i) S ho t anticipated injl.al
st e- le at he ion art'
Cos t o f imperfectly or tions, (v) Cost o r co st, (ii) M en u cost,
anticipated in fl at f in co nv en ie nc e (iii) Cos/ of
0 Li nk be tw ee n M ion includes : (i) E in in d iv id u a l fina
on ey S u pp ly a n ff ec t o n decisi on ncial planning.
d In fl at io n : In th making, (ii) Eff ec
growth rate o f mon e lo ng ru t on wealth distribul
ey caus es equ.al in n w he n all adjust ion.
0 E qu at io n o f Exc cr ease in in fl at io n. rn en ts have taken p lace
h an ge in P , in crease in
er ce n ta ge Term
:
(H ere, m : Percent
age change in m m + v = 1t + y,
⇒ 1t = m
1t : Percent oney supp ly; v : - y +v
age change in the Percentage chan
0 R el at io n sh ip pr ic e leve l; y : Perce ge in the velocity o f
be tw ee n N o m in ntage change in circulation o f 111 011e
a l In te re st R a te real output .) r
Nominal Interest , R ea l In te re st
R ate = R eal inte R a te a n d In fl at
rest rate + In fl at io n R a te:
ion rate
I I. Objective Type XERCISE .E
Questions
t (i) Choose the co
rrect answer from
the given alterna
l. W h ic h o f th tives:
e fo ll o w in g ec
o n o m is ts te rm
(a ) E . S h a p ir o ed in fl a ti o n a
s a p h en o m en
(b ) H a w tr ey o n o f ri si n g p
(c) K ey n es ri ce s?
2 . T h e co n ce (d ) N o n e o f
p t o f se m i- in fl th e a b o v e
a ti o n is c o in e
(a ) E . S h a p ir o d by:
(c ) K ey n es (b ) H aw tr ey
3 • The (d ) n o n e o f th
ty p e o f in fl a ti e a b ov e
o n w h ic h is co
(a ) cr ee p in g in n si d er ed a s g o
fl a tio n o d fo r th e ec o
n o m y is :
(c) n o in fl atio n (b ) w al ki n g in fl
at io n
(d ) su p p re ss ed
- in fl at io n
218
 ntr y rise s, it is known as :
f goo ds and ser vic es of one part of the cou
rices
O
. (b) wal kin g inO a Lio n
¥11efl P . f1at1on
J. ' . ·eeping in (d) spo rad ic inO aLio n
(;1) t i . {lac.ion n?
pen iJ1 •og is a sup ply sid e factor of inflatio .
(c) o tbe folloWl
, (b) Inc rea se m cos l of key inp uls
Vbicb of
5 ' ) 13Jack 111one) . (d) No ne ofl hes e
·
(:1 . fi nan cin g
n?
c) oefiClC win g is a dem and sid e fac tor of infl atio
(
O
f tbe fo 11 o (b) Def icit fina nci ng
wbicb
6, k rno ney
(a) 13Jac ry pol icy (d) AJI of the abo ve
rnoneta infl . n ,.
) c hea p ing fac tor s cau ses atio
(c fi llow
. b of the o (b) Vel ocit y of mo ney
7. wwc
_Money sup p1y ( d) All of the abo ve
(a) . .
.
c) Real out put l rate of inte res ts 1s:
( . h ·p bet wee n mo ney sup ply and nom1na
The rela oon s l (b) ind irec t
B.
(a) direct e of the abo ve
· e dire ct and som e tim e ind irec t (d) non
(c) some um and infl atio n rate is known as:
c ne adi ust me nt of nom ina l inte res t rat e
g, one-1or-o ;,
(b) infl atio n effe ct
(a) adju stm ent effe ct
(d) non e of the abo ve
(c) fisher effe ct
10. Exchange res erv es in the cou ntr y inc
rea ses wh en:
(b) mo ney sup ply dec rea ses
(a) money sup ply inc rea ses
(d) non e of the abo ve
(c) money sup ply rem ain s con stan t
7. (d), 8. (a), 9. (c), I 0. (b).
Ans. I. (a), 2. (c), 3. (a), 4. (d), 5. (b), 6. (d),

• (ii) Fill in the blanks with appropriate word from

the words given in the bracket.

1. In case ofc ree pin g 1'nfla t.10n pnc · rea se nea rIy b y ..... ..... ..... ..... . per cen t per ann um .
· es mc
(thr ee/ ten )
· oth erw ise kno wn as ..... ..... ..... ..... . .
· n 1s
2. Semi-in fl atio (ope n infl atio n/b ottl ene ck infl atio n)
nical cha nge s·Is a ..... ..... ..... ..... . £act or o r·m fl at10n. (su ppl y sid e/d em and side )
3· Tech · ·
4. Money su I .
ion . (on e/so le)
5. N . PP Y IS ..... ..... ..... ..... . fact or ofin flat
· • .
omina] intere st rate IS the sum of real mte rest rate and ....................
(inf lati on rate/ defl atio n rate )
6. I ., gat.1ve
. e1y,ne . 1y)
ncrea se .in sup I f ...... .... cc ct exc han ge rese rve .
aue (po sitiv
7, R. P Yo mo ney ..... ......
eaJexc h rs to exc han ge of.. . ........... ..... ... (cu rren cies /goo ds and serv ices )
8. Norn · ang e rate refe
1 ovr h ::i no-p nf.. . . .... . . ... .. ......
(cur renc ies/g ood s and sen ·ice s)
 6. po siti ve l y 7
, ·
en
go od
k
s
.
an d
fl
Ans. 1. th re e ' 2· bottl ec m at w n,
se
.

rv1c
3. su pply side, 4.

· es, 8. cu rr en oe• s.
on

False:
. .
e, 5. mflauon ra te ,
I
wi ng statements are True or
t (iii) State whether the follo ing pr ic es .
(True/False)
viewed in flation as a ph en om en on of ris (True/FaJse)
I. Monetarists pl oym en t ph en om en
on .
n is a po st -full em
, inflatio (True/False)
2. Ac co rd in g to Keyn es
e.
ssifi ed accordin g to sc op (True/FaJse)
3. Infla tio n can be cla
in fla tio n.
ad e un ion ca n' t in fl uen ce th e ra te of (True/False)
4. Tr
we ll as su pp ly sid e ca uses of in fl a tio n .
de m an d as (True/False)
5. T he re ca n be both ey suppl y.
la tio ns h ip be tw ee n in flation an d m on (True/False)
re
6. T he re is inve rse be fo un d o u t.
real in te re st ra te ca n
7. Giv en no minal ra te of in te rest, (True/False)

8. Mon ey is ne ut ra l
in th e long ru n. st ra te
fe ct ed in th e Jo ng ru n nom in al in te re
rest ra te un af (True/False)
9. To ke ep real in te
ofinfla tio n exactly. (True/False)
m us t ad ju st the ra te e re se rv es .
e ex ch a ng
supply ca n in flu en ce th e, IO . True .
l 0. Ch an ges in m on ey lse , 7. Fa ls e , 8. T ru e , 9. Tr u
, 5. Tr ue , 6. Fa
ue , 3. Tr ue , 4. Fa lse
Ans. 1. False, 2. Tr
ns
I 11. Short Answer Type Questio
1. Define inflation.
m an d- pu ll in fla tio n ?
2. What is m ea nt by de
h inflatio n?
3· What do yo u mean by co st -p us

4. Write Fisher 's equa

tion .

m on ey su pply affect the ra te of infl at ion?

5. How
th e relations hi p be tw ee n money suppl y and nomin al rate of in te res t.
6. State . s1.
S
nshi p be tw e . fl . mm
.
al ra te of in terest and rea l rale of in1 ere
7. tate the re la
.
uo en m atwn , no
D' .
8 betw ee n no m in al an d real exchange rate .
. i~t mgw sh
'F· h Err
9. Wri te short note on JS er uect '.
nsh. b .
I 0. Exphiin th e rela tio 1P etw ee n exchan ge pp ly.
rese rves and money su
I Ill. Long Answer T,,ype auestm. ns
j

Ex plr· l .
1. \\!hat is inflc1tion ·;, , a.111 t 1e soc1·a1costs of mfl atio n.
' , , .
2. '\ h,11 ,1re m am ca11sts of . fl .
? ls little in fla tion ao od for the econo11n· ?
lU ation 15
E . , . d and-pull and c .
3. xp1,1111 em ost-push mflation .
. .
4. r,xp/;1111 the re la tions hip betw een money supply and infl ation .
. . · Ill
_____,,,,,_.
, een infl c1tio n .
th<' Im k be tw terest rate.
5. r,xp hu 11 and in
 . .rt ·me constiLute the ummplnym1 :n1 Poof
at any point 01 z . . .
0 Unemploym ent Pool: Number of unemployed persons_ p rson remains unemployed zs the rlvraturr, r,J
l ~ e f ~ a e
0 Duration of Unemployment: Average eng,
unemployment. unemployment around which the economy /lUcl1J.Eile s
I . the average rate of
0 Natural Rate of Unemployment: tis
in the long run. t
,I' Unemploymen :
0 Equation for Natura l Rate 10 U 1
-==r
L - +1
.r . b ~eparation; f: Rate of job finding.)
l t,.· s .· Rate 01 JO l GDP. 0 ne extra point of
(Here, VIL: Rate of unemp oymen . between unemployment wage and rea
0 Okun's Law: There is inverse relationship
d . 'b t ·
unemployment cos . of GDP
t 2 per cent ('i) Effect on income istri u ion.
u, · ·d·
t· (z) Loss of output, z 'll' •·
0 Cost of Unemploymen · h d fri ctional unemployment, (n) rrage rigi ity and wait
0 Causes of Unemployment: (i) Job searc an
unemployment. pl d . p d ections in the mobility of labour across different occupations.
. nt· It occurs ue to im e,1, . ...
0 Frictional Unem o~me · ;r, ( ' ') rr. h louical change and innovation , (m) Collapse of firms.
b e 0 r- (i) Sectoral shi-", zz iec no o ·
It occurs ecaus 'J• . .d wage rate to adiust labour supply with labour demand. It occurs
. u ,11 1 ment· It occurs because of rigz
0 Wait nem~ oy . . ·
'J . . •. . .

l (") L bour unions and collective bargaining, (m) Efficiency wages.

because of (i) Minimum wage aws, zz a
EXERCISE
I 1. Objective Type Questions
t (i) Choose the correct answer from the given alternatives:
I. An unemployed person is one who:
(a) has actively looked for work duri ng the previous four weeks
(b) in waiting to have recalled to a job after being laid off
(c) willing and ready to work at the prevailing wage rate but does not get work.
(d) all of the above
2. Unemployment rate may be defined as:
(a) ratio of number of persons unemploy ed and size of labour force
(b) ratio of number of persons unemploy ed and size of total populatio n
(c) ratio of workforce and total populatio n multiplie d by I 00
(d) none of the above

3. Which of the following define natural rate of unemploy ment?

(a) Total unemploy ment in the economy
. he long rur
(b) Average rate of unemploy ment around which the economy fluctuates mt
(c) Number of unemploy ed persons at any point of time
(d) None of the above

■ 228
 .
g i s a cause o f Iin•c h o n a J unernpJo Yment?
o f t h e followin
lVhicl1 fi
(b
) lnn ov,n
ion
4. s e o 1. , r m s
) Co ll a
p bo ve
1\1/ or th e
(a . a
s /11ft (d)
(c) S c c
w ral a caus
e of.,., y-;i
i n g i s ..-age rigidit ·
ollow
h i c h of the f 1 s
. W
5 . . m u m w a g e aw .
(a) Nf m 1 in i n g b y Jabou r unions
ga
C o ll e c tive bar
(b) s
f f i c i e n c y wage
(c) E
ve
A l l o f the abo
(d) (d).
. ( b ) , 4. (d), 5. . . the bracket:
J . (d), 2. (a), 3
te w o rd from e words given m
th
P.
AJJs .
appropria n t and real CD
ith m e
l in the blanks w .
e re la
b
tionshi p etween unem
plo y
hillip/ Oku
n)
ii) F il m v e r s (P
1( nded pou n) racio
.......... .... p r o o ss o f o urpu c/Mig
1. ....... e n t.
(L
rivic y is c
alled
l o y m i o n a c
mp uct
. i s a c o st o fu n e p a r t i c i pating in the prod e n c /pa rcicipacion
)
............ o n actu
ally (unemplo
ym
2. . . . . . . . . po p u l a t i
e n t age o f .. . . owth )
3. P e r c
. . . r a t e . o f .. .. .. ..... .. .... .. p ulation gr
. . . . . . . a u s e la w /p o
........... e n t occurs b
ec
( m inimum
wage
o y m
unempl
4. Wait n e m ploymen
t.
E ff iciency wa
ge)
ction a l u sur a n c e/
c y t o r e d u c e fri U n e m pl oyment in
poli (
. . . . . . . . . . . ..... is a u m wage Jaw
,
5. .. 4 .m i n i m
. p a r t i c ipation,
f outpu
t, 3
L o s s o
, 2.
1. O k u n e. (True/Fals
e)
Ans.
m e n t i nsuranc T ru e or False:
l o y a re
tatements
p
5. U n e m in g s (True/Fals
e)
the foll o w
h e th e r e m p l oyment.
I (iii) State w y h igh degr
ee o f
1
s b t.
c h a r a cterist i c
f u n e m p oymen (True/Fals
e)
Boom l rate o
1.
o n o fn a t u r a
qua t i r a t e.
2. U = -1- is t h e e p loyment e)
- 1
d
· tes a r o u n u n e
m (True/Fals
L f + u a
s l o y m e n t fluct e d w orkers aflcl (True/Fals
e)
unemp loy
3· N atural r a t e o f n u m b e r o f emp
of
r c e i s the sum on .
4· Labour
f o
s . f d v e r seselecti
ker ·b 1·11· ty o a
e m p l o yed wor p o ss 1
un . ses
5• h
H .1g e r w a g e r a t e m c r ea
e, 4 . T r u e , 5. False . 229 II
. T r u e , 3. Fals
2
Ans. 1. T r u e ,
 0 l'hillip.,· ( .'un,,,; 11 .,/,11 111 , 1111 111 111•111• 11•/,111 11 11\lll/ 1 li, •/ 1111·, 11 t h,· 111fr 11/ 11 11 ,·111 /d,,1 ,111 11 111
/ , ,/ t/11· 111 1, ,,J ,
11 , 1111 , , 1,

l//(Jl/ r' )l ll'tl!; t ' /li/1•. n , 11 1d ,1 /1 111/\hl/ 111 h 1111•, l ,111,1 11 ,·111/1 1J/1(1 / \ /ll 1l
y l// 1/ J, l1y ;/ ,,v
l ' /1 JIIJJ, q 1/,1 11t1JI 1::1, // //// /'1 / /
/

/1/'liut/.
111/l11 / 1111111,11/ 11111·111/1l111/II' 11/ 111/1 11//1
0 Phillip.,· (.'11 ,-,,,, ,.;'I""''"" / /,,•('1/ll till///l 11/ t/11· 1,·/,1/ 11111·,!11/ 1 Ii, / 11//"I' // 11/11/11

/J, , , '.\111 , ·1,w / 111 ·

I JI,, I - II ~ I I I ( I ) ( II ,i' ) I
l/,•11·, II~, 1.' ( ,'1111 ,·1!1 (/lllg , · 1,1/,·
, : · /i', •4 11111.,·i o 1' //1',\,\ 11/ 1/IIIJ.!.1 ' /11 /l// 1'/l!/J/uv111, ·11 I
II : / 111 1'111/J/1~') /l/1 ' /I/ /f/ / 1•

11 ': No t11ml rr1./,· of 1111,·111/1l, 1·111111•11/

1111d II - 11 ' : ll11t tll/ilr~y1111•11/ J!. 0 / J

/tl 'r11-: 1• 1'111 /tm , ·11 m1/J/11·1 1/ 11111 (/(l ; 1n t ,w11 I lfj 11wr 1·i 111 11· \/11,11 ,. 1/11· , /,11 1,?'' 11,
0 Wag,• Stitkim ·.u a nd its ( .'r11u,•J:
r ln1.1t'/1f.'. , /111 u1r111h11.11./11111 j111)1/.n1, ,
ll ll f lll/J/l~Y1111't1/ m l t'. I I ha/1/Ji'II.I' li,·u 11111·, (i) m1fH' t/1•r / m/11 1111,t/111 11 ~11111/fl'I
(iii) ,jji1:i11ll( 'V wai l' !ltn ny, (io) to11/m1 /I m11/ loug t,·1111 , ,,/ 0 l1u1 n l11/1
0 Inflatio n Exprcla tiou.,·- A 11,:111,mtt'II /'/, illi/J.'i (,'u rtlt': II 1h111111 //11· ,d11l1111n luf1 IJ,,1111,,,," 111/ IJJ.1.,111, 111fp1 ~tR,f
with its o .jJt'i."/t'rL ratt', muL tht• ·1 tu1:111/ 1l11y1111:uL rntr•. 1lr:l111JI m//11/11111 11 1ft.l1:1111111 NI IJ"//, h') 1:1,j1N.l.r:1J r1J/l11 b1111 11/1//

l/'lli!/11/Jli~ym m t l1•11t'I . '/lit• r•1111r1ti1111 / m 1111J1/n11 l'/11/li/1 .1 1·11 ~0,· 11

/ if' 'JI.,. 1; ( 11 II )

l ,v IL
Sinn' 'II. . )
n ,; ('11
⇒
⇒ n n' ,; (u - u · )

0 Stagflation: It 1'.1· a sitll1tl.ion 1:ltr11'fu.'/r'11.wl hv /11j:h inf /11.l.um mu/ h11:lt 11w '111/1l lfy'flwnL 111,/r~ ( }IJ.lj/1),l /fl//. ) ftJ,/.{ 1/f
rf1main 1:011slrm l .

I I. Objective Type Questions

t (i) Choose the correct answer from the given alternatives:
I. Who presen ted an empiri cal rclafio m;hip bcfwc cu flu: ,·ate of urn:m ploynu
:ut and th,: r<J.f.l:
of increase in money wag,~s?
(a) A. W. Phillips (I>)< >k1111
(c) F.S. Phelps (d) No11c of'r/w ;1bovc

2. Who advoca ted that thcr·e is no trade -off be twee n une mploy m e nt and inflati ou
iu tlu: lfJng
run?
(;1) Robert Lucas (I, ) Mi /1 0 11 Vri<'drll ,fll
(c) AW l'hillit>s I
r (c ) No 11 <' of' 1/1(' ab,H·,·
3· Whirh of the fi 11 - · . ·
o owmg is•• n·c.1so11 of wc.1gc .'i fi<.:ki11 cs,;?
(a) linperfc..·n i11 forn 1;11io11
(b) Lack of . 1· ·
- too1c 111;1110 11 ,1111 o i tg rhc <·tn ployc-r..,
 (c) Wa ge contract
(d) All of the above
Ans. 1. (a), 2. (b), 3. (d).

t (ii) Fill in the blanks with appropriate word from the words given in the bracket:
I. ... .......... ........ developed augmented Phillips curve. (Edmud Phelps/Rober Lucas)
2 . ...... ............... is a situation characterised by high inflation and high unemployment rate.
(Inflation/Stagflation)
3 . ..................... Phillips curve shows absence of trade-off between unemployment and
inflation. (Long run/Short run)
Ans. 1. Edmud Phelps, 2. Stagflation, 3. Long run.

t (iii) State whether the following statements are True or False:

I. According to Phillips curve hypothesis, wages are sticky and move slowly over
time to absorb unemployed labour force in the economy. (True/False)
2. Money is neutral in the long run so far its effect on output, employment
and aggregate demand. (True/False)

Ans. 1. True, 2. True.

I 11. Short Answer Type Questions
I. What is Phillips curve?
2. List the causes of wage stickiness.
3. What do you mean by augmented Phillips curve?
4. What do you mean by neutrality of money?
5. State the nature of long run Phillips curve.
6. Briefly state wage-employment relationship.
II. Lon Answer Type Questions
. hat is Phillips c~rve? ~hat are its policy implications?
~ . Why are wages sucky? Give reasons for wage stickiness.
3. Examine the short run and long run impacts of monetary expansion on output and price
level.
q ,,inguish between short run and long run modern phillips curve.
Ill
 •

I I OIJjecllve Type Questions

6·
• (I). Choose the correc t answer from the given alternatives :
I . A lradc cydc has:
(a) o ne pl1 asc (b) tw,, pha ses
(c) 1l11·cc pha se.~ (d) lour phases
2. Which of the following is not a P I 1a1,e of trade cycle?.
(a) 1100111 (b) Recession
(c) Revival (d) Trough
.1. During the phase of boom, the JeveJ of employment:
(a) in creases (I,) d ecreases
(c) s udde nl y fa lls
(d) none of Lh e above
4. During fhc phase of boom, the Jeve) of output/GDP:
(a) in cn ::<1ses
(b) d ecreases
(c) s 11dde n/y fa /ls
(d) non e of Lh e above
5 . Trade cycles are related to:

(a) income
(b) employmenL
(c) prices
(d) all of Lh e above
6. Who propounded over-investment theory?
(a) F.J-1 . Hayek (b) Hawtrey
(c) Milton Friedman (d) None of the above
7. Who said trade cycle is purely a monetary phenomenon?
(a) F.H . Hayek (b) Hawtrey
(c) Milton Friedman
(d) None of the above
8. Intended policy change for political gain is called:

(a) policy business cycle (b) political business cycle

(c) rea l business cycle (d) None of the above
Ans. 1. (d), 2. (c), 3. (a), 4. (a), 5. (d), 6. (a), 7. (b), 8. (b) .

• (ii) Fill in the blanks with appropriate word from the words given in the bracket:
1. Boom is cha racterised by ... ... ....... .. production and prices.
2. Under recession, th ere is ........... . in income and output. (risin g/falling)
3. During the period of depression, business people grow ... ....... ... . (fal\J rise)
(pess im isl/op ti mist)
 fhtJOfit:is ut TmcJo Cyt;IO

r i,, l' loy111 <·11I i111 1(';1,1 ·~ il ll d 11 11 , 11. .11 1

J. llt LI 111~ tlor 1..-1 iod nl 11·<nvr•Y· · · ......... l'"'lil(111111
1. ('Jb ,J

lit I dh .......... · (l" w/lii gli J

1
1h11 i11P dr11n·s,io 11 , l,.111k c r<'
J

._J. r,
cs in ' · ....... ........... I •
c:i 11 sts IJ11 si 1H· ,,
11
b, . Ill o«l111g ll• Kr y111 ·1, r ""'~ · ·.... · · · s.s ry<,. · (11 1Yt·s11110, 1/in1<nn o,J
I
\ ii dill~ 10 Mo• a-I ,LI"' , • I""•~<'·' 111 " .. "" """""" · ra LI Sl'Sh111i11,•s, , yd,·.

7. 01 . .. . . . " (,01111,·yI IJ l'l'l y/i"""'"'i

1
...... .... .. . i~. .,,i H•tli o cl11 ,101 111. o lt1
. .,1cl1 . cy1l1s. . (M< "".,.,ry po ". y/1nm l111<·111 I
1
y, 1, J"'. .......... .. ......... tl l<'or y. lli11111 ,1 110 11 111 1.R/\S rnrv<" r,(US(;~
· th (; r<·•·· I (''J)I'l o llu<1wllc.
(1 (',ti Ii,1~ill (;S~ <Y' lc-/polili1 al bminC's~ 1 yeleJ
8
., in"o, ~- fall. :I. pcssir1 1is1. •I. r1 111n·, r, . l11w, Ii. l11 vl'.1l1 ncnl 7. M11 " "Y\U f> I
•I Ll S, L' . ' I' y, . MIIJLO,I a, y
I
·, I) tT,d !JllSltll'SS I yd('.
Ill) II ' . .

(iii) state whether the following statements are Trueor False:

(True /False)
1 J. prJ" l',sioll ,., r1L,1rar1 rrisl'd hy i11n<·asi II g prod 11 rli11r1.
(Tru e/Fal se)
. r, , k, ,fr., ,11 ,· .dwrnal ions ol p rospcril y"nd dcprcssi11n .
11 1 (Tru e /False)
j2. rh r pr• ,d .,1 1r,ule ryrk is Ii xl'd a 11d docs 11<>1 onn r again and again.
11
4. µ l,ooill period, prod11r1io 11 is ,naxim11m and econom y rcarh l'I
(Tru e /False)
11111111
till· It'' 1•I nl I1111 L' tll plo y111c11 t. (True/False)
j , lln,, g ,., "" •1'\'. dcma nd for goods falls ;ind Ihus in vcSI men11end.11o (all
11 1
6. Illl ,·<I 11>111111h , d :11 i11g Io Irad<' cydc do nol incl11dc pr ire rn ntrols, (True /False)

11.l ~ l' 1 111111 I l I:,, , l ' I l . (True/False)

,. 11tc11•.1rc li,rs1 :1g('\!>I 11ad('cycl1·s. (True/False)
~- Jhi'<" , 111 r. LI in n,d ,·,pr·<1,1Ii1111.s wa, pi IIJHII 11 1dl'd b) Rohe, t Lucas (True/Fal se)
9. \III J,.d , .Lin •• " •" 1111' JH 11p11ut·nt 111 p11 lit ir: d husi u,•s,i \d e. (True/False)
IO. ' "' '"'' 1hco•1 ol 11 ,ulr n ·, Ir 1111, ih t hl' pri 11ri pk 111au l'kration
Ans. I J.1/.f. ~
III u·. :1 F,1bl', I I111l'. :, . F,,isl'. Ii. Fahr . 7. Fahl'. 8. Ii LL<' . !l. It 111· I0. l1t1<

I 11. Shor1 Answer Type Questions

I, \\ h.,1 ,, h11 , tlll' ' ' t \ ( le:

'..) l 1,111r
I , .111Pll ' ph.,,c, 111 ll,1dc t Hlr
3· \\ I1.H 1, 11·w, ct, ph,,,c 111 11 .1dc t \l ll,
4. \\ h.ll 1, lllt'.1111 tn t kp1 f " tnll :

5. lldtltl' lli~llll

6, \ t·II t' rItr 1 I1.11.H 1n 1, 111 , Pl II .1dc t \l Ic

255 ■
r

Chapter-1 Consumption Function

· t IH' avcr;1gc
't \tVI 1a 1 1s
.\~~ 1111 11 , 11, ,11 ,1 i11n11111 ' is 10 1111i1 s wi11t rll11s111111>1io11 ol' !).(--, 11111 s.
l, , , \Sil \ (ti t'll llSlllllt '(
pr111 H I , . . , .
,, tf ;:i pcr<'<' 11t 111'1·,·1·n· :1dd111011:d 11u·n11H' 1s sp<·111 011 ro11s11111p1io11. what is 1he Ml'C ?
...
lf tlt l' ~1I c is (l.~ :11111 disp11s:d1k i11rn111<' is Rs . '..!00, tlu·11 wha1 is the value of s:,ving?
1

:L
. I •s 1hl' 'sl11p<' 111' tlH' n111s11111ptio11 lin<' llH':1s11rc ?
-L \\ 11:11 1 \ 1\ •
•J,;,n•11 <'si:111 ( :1l11s11111p1io11 Ft11H'lirn1' the awragc propc11sit y to consume falls as
5, In I IH' .
. . .. 1 1, i11\'0llll' i111-r1·:1s<'S. ls it 11 ·11<' or 1:ilsd
I I1~ptl~. 1 1 1

(i. \\'h:it is 1hc l'tdl l<H'lll ()r ~,I'( :?

7. \\'h.11 is the 1'11ll l1lrtll or :\I'( :?
Ill li11d (Hit :1\'n:1gc prnp<'11sit )' lo ro11s11111c .
8. \\'rite the for11111l:t
9. \\'ri tl' the l11rn111l:t 10 li11d 0111 lll:lrgi11al prnpc11sit )' 10 ro11su111c.
10. \\'hal is the r:111gc ol'rodliric111 ot' /\l'C :ind MPC ? ranges
I. 0.%. ~- O.i5. :I. t 40, •I. MPC. !i. ' lt·uc , G. l\llarg·i11al Pro pe nsi l)' Lo co nsum e, 7. Average
.:1itlS ,

.1C , I 0. Be l ween zero and one.

Pninc11sitYto ro11s111nc. K. :\l'C =~, 9. M PC = i1Y
r , \'
d

Chapter-2 Theories of Consumption

1. \\'110 propoun ded the pcrmanenl inco me hypolh es is of co nsum er beha viour ?
2. ln the simple Key nesian model consumpLion is a fun ction of:
3. \\'hat is disposable inco me?
4.
\\'ho propounded t.he absolut e inco me hypolhes is of consum er behaviour ?
5
· \\'ho propounded the life cycle hypothesis of co nsumer behaviour?
6
· \\'rit e any one lea tu re of absolute income hypothes is .
7
· \\'ho propounded the relaliYe inco me hypothesis of co nsum er behav io ur ?
S. Ducse nberry holds that. consumption is a function of prev ious pea k level of inco me. What is it
c1llrd ?
9. Den1ons1r:1t'10 11 en· ., . -
c <'ct is ,ilso known as: or
10 , .
· \\ hat is 11 , ,
kasured mco me ?
Ans. l
· ~lilton F11-·
~lodi rl·- . ~uma n, 2. Level of income. 3. Inco me after Tax, -t . J. M. Key nes, 5. Franco
g i.iru, R1dnc1 ·d B rumberg and Alberto And o, 6. In the Iona run ~IPC < A PC . -I. Pro 1·•
Du.tsenber .. ~ ... o
l'!lst 1
' · ti. Ratchet Effect. 9. Du ese nberr:· Effect. 10. Ym= YP+ Y1,
 Chapter-3 Investment Function

I. An in creases in investment is mos t likely to be caused by:

2. An injection that in creases aggregate demand.
3. What is the differe nce between gross investment and net investment?
4. In duced in ves tment depends on level of income and:
5. Write the ful l form of MEC?
6. Nomin al (money) rate of interest - Expected rate of inflation =?
7. It is an expen diture on fixed assets such as plant and machinery.
8. It is that in vestment which is independ ent of the level of income or output.
9. Net in vestment + Replacem ent investment = ?
10. ·w rite any one source of autonomous investment.
11. Write any one factor affecting investment.
12. Suggest any one measure that can be taken to stimulate private investment.
I\ Ans. 1. Lower interest rates, 2. Investment, 3. Depreciation, 4. Rate of interest, 5. Marginal
efficiency of capital, 6. Real Rate of Interest, 7. Real Investment, 8. Autonomous investment,
9. Gross Investment, 10. Taxation, 11. Aggregate demand, 12. Reduction in the Rate of
Interest.

Chapter-4 Marginal Efficiency of Capital

1. A profit maximizing firm will invest up to the level ofinvestment where the cost ofborrowing
equ als:
2. What an outward shift in the marginal efficiency of capital should increase:
3. Why does an increase in investment lead to a bigger increase in national income?
4. What does happen to MEC when investment rises?
5. Mention any one determinant of marginal efficiency of capital.
6. It is the aggrega te net return expected from it during its whole life time.
7. It is a current cost to be borne by the investor for undertaking an investment project.
8. Mention any one cause of decline in MEC?
Ans. l. Marginal efficiency of capital, 2. Aggregate demand, 3. Due to Multiplier effect, 4. MEC
fa lls, 5. Prospective yield, 6. Prospective yield, 7. Supply price, 8. Diminishing productivity.
 Cha pter-5 Investmen
t Multiplier

l. K ey ne si an m ul tip . I
lie r es 1ablis h cs re au.on s·I11. P be lw ee n in vesl rn en t an
2. W ri te th e fo rm ul d:
a l'o1 fi nd in g m ul tip
3. If in ve st m en t in li er.
cr eases by ~ 5 cr or
e, an d co m eq ue nl 1 G D P in cr ea se s b y t 20 cr or h
fi nd tl1e valu e of m Y, e, t en
ul tip li er.
4. W ha t is th e re la . . . -
tio ns hi p be tw ee n
rn ul up he i an d m ar gi na l pr op en si ty to co n su _
5. vV ha t is th e re la . me ~
tio ns hi p be tw ee n . 1·
m u 1up ,e r a n d m ar gi na l pr op en sity to sa ve _
6. If M PC is 0.2, ~
fin d th e va lu e of m
ul tip lie r.
7. If M PC is 0. 6, fin
d th e va lu e of m ul tip
lie r.
8. If M PS is 0. 2, fin
d th e va lu e of m ul ti pl
ie r.
9. If M PS is 0.6,
find th e va lu e of m ul
ti pl ie r.
A ns . 1 I
t::.Y
. ncome, 2 . t::.i' 3 · 4 5 K = !- M P C 5. - 1
, · - , 6. 1. 25 , 7. 2. 5,
1 ' M PS 8 . 5, 9. 1. 67 .

Chapter-6 Principle ot
Acceleration

1. Who did enunciat

e th e principle of ac
celeration?
2. What is the form
ula to find accelera
tor?
3. It is the am ou nt
of ad di ti on al capita
l re qu ir ed to pr od uc
4. Mention any on e a u n it in cr ea se in
e as su m pt io n pr in ci sales.
pl e of acceleration .
5. Mention any on
e de m er it of th e pr
in ci pl e of accelerati
6. Mention any on on.
e significance o f th e
Ans pr in ci pl e o f ac ce le ra
. ti on .
· 1. Aftahon, 2. A cc C ha ng e in ca pi ta l
el er at or =
. .
C ha ng e 111 in co m e , 3. Accelerator, 4. N o Excess . .
C on su m er Goods In C ap ac ity m
du st ri es , 5. U nr ea li
6. E xp la na ti on o f tr st ic A ss um pt io n o f
ad e cycle. C on st an t C ap it al -O
ut pu t Ratio ,

Chapter-7 Investment T
heories: Samuelson and Hicks
Models
1. Who pr op ou nd ed
th e th eo ry o f tr ad e cycles
2. According to S am th ro u g h m ul ti pl ie r-
ue ls on , th e cyclical ac ce le ra to r interact
3. Wri ch an ge s in an ec on io n?
te eq ua ti on o f co ns om y ar e th e result of:
4· Men um pt io n fu nc ti on as
tion any on e criticis p er S am ue ls on .
m o f S am ue ls on 's tr
ad e cycle th eo ry.
 Macro
econorr-1cs
5 . In wh ic h b
o o k h as J. R . H
6. \Vri te a n y ick s for m u la te d
o n e assu m p tio an im p o rt an t th
n o f H ic ks' tr ad .
7. W rite a n y o e cycle th e .
n e C ri ticism o f eo r) of tr ad e c~·d es
H ic k s' tr ad e cy :-
A n s. \. H ick s ~ e th eo :. .r).
an
4 . U n re ali stdicSam u elso n , 2 . In te ra ct io n b
Ass u m p ti o n o f et
6 l C o n st an t MPwCee n mu{ti r
. Va u e o f m u lt • . ;; C ~b r_an d accele
ip li er an d ac ce ' " · o n tn 1e ra
le ra to r is co n st
an t 7 I u u o n to the T htor, 3. . Ct=f (\ t- 1).
' . g n o n.n g se f
Chapter-8 M condareo r)cto Trade Cycle
y fa or s. s.
oney Supply and
Measures ot Mone
y Supply in India
1. ·w h at ar e te
rm d ep o si ts ?
2. W h ic h m ea su
re o f m o n e y su
p p ly is co n si d er
3 . W h at is M1? ed as b ro ad mon
ey ?
4 . W h at is h ig
h p o w er ed m o
n e y?
5. W h o ar e th
e su p p li er s o f
m o n ey?
6. W h at is m o
n ey m u lt ip li er ?
7. W h o is th e au
th o r o f th e b o o
8. C u rr e n cy w k "A T re at is e o
it h th e p eo p le f M o n ey" ?
+ D em an d de po si
9. M = C u rr
en cy w it h th e p ts wit h b an k s +
eo p le + Dem an O th er deposits
2 with R B I= :
d d ep os it s wit h
R B I+ ? b an k s + O th er
10. M = C u rr depo sits with
e n cy w it h th e p
3 u b li c+ D em an
11 . H ig h P o w d de po si ts with
er ed M o n ey = b a n k s+ O th er
C u rr en cy with d ep o sits with RB
th e Public (N o l
12 . M en ti o n an te s+ Coins ) + ?
y o n e fa ct or th
at in fl u en ce ve
locity o f m o n ey
13 . M3 - M1 = .
?
1 4 . ·w h ic h is th
e n ar ro w m ea su
re o f th e m o n ey
15. W h ic h is su p p ly?
th e b ro ad m ea
16. A m o n g M su re o f th e m o n ey su p p ly
, M , M
an d M ?
1 2 3
, w hi ch is th e m o st li
1 7 . W h o re g u
4 qu id m ea su re o
la te s th e m o n ey f th e m o n ey su
su p p ly in In di a? p p ly?
W h ich is th e le
18. as t li q u id m ea su
\. T e rm d ep o si re o f m o n ey su
ts ar e ti m e d ep o si p p ly?
Ans. + Dem an ts , su ch as fixed
d r\eposits + o
w it h p u b li c + th er d ep o sits w
B an k R es er ve s, it h R B
de po si ts , 2. M , ,
I , 4 . H ig h Po w
~
3. M 1 C u rr en
c,- "i th pu blic
M o n e y m u lt ip li
er is
5. G o v er n m en
t. C en tr al
er ed Mo n ev (H
~
) Cu rrenc:
JM h ey n es. 8 . M ,. 9.the ra ti o o f ch an g e in su p p ly o f m o n ey Ban k au d Co mm er cial ba nks. ~-
D ep os it s With th to th e ch an g e in
11. B a n k R es e e p o st o ~ c e savi m o n etary base ,_'.
n·es. l~- Q u an u n g ~ an k s, lo . 7:
18 . M 1•
t y o f Money. l 3.
~
M ,- M, s. 14.
ime d e_p os u , ,~1t
M,, lo . M, .1 0 . M
h bank>
,. \ 1 . RBI .

■ 6
 - 1.a'lg....i\t~):f;i'~•':ti.~:a--- -
1- -
One Wor d A ns w er Type Q ue st io ns
I ian Approaches
ssical and Keynes
9 Money Supply and Price Level: Cla
Chapter-
va lu e o f money?·
de te rm in aLion o f
• . lh e old es t th eo ry o ft11e
J. W hi ch 1s V denoLes?
aLion, wha r d o es
2. Jn Fisher's Equ an liL y Lheor y o f money
.
assu m pt io n o f qu
3. Write an y o ne ey.
criticism o f qu an LiL y Lh eo ry o f mon
4. Write an y o n e n.
E qu at io n o f C as h Balance Equatio
_ Write Marshall's
5 ·.
_ Write Fisher's
equaLion. io n, 3. Fu JI em ploy 4 . D ifficult lo
6 elocity o f circ ul at ment,
o f Mon ey , 2. V ' '
1 Q ua nt it y T h.eo ry - T
-
- M V
.
+ MV + M V .
An s. . 5. M - K Y, 6. P
Measu re Velocity,
hapter-10 Demand for Money
C
.
am o u n t o f w ea lth lh at every one m the
"T h e
an d fo r m o n ey as dr
W ho ha . s de fi ne d d em .
o f m o n ey ba la nc es is called the de man 1or money."
1· hold m th e fo rm
ec on om y wishes Lo d?
di re ct d em an d o r de ri ve d d em an
2. Js m o n ey a
eq ua ti on .
3. Write F is he r's
4. Write Marshal
l 's equation.
en ce .
an y o n e m o ti ve o f liquidity pr ef er
5. Write
n?
6. What is w in F
ri ed m an 's eq u at io ey.
d et er m in in g th e d em an d for m on
e Fa ct o r hat function of mon
ey?
7. Menti on an y o n cl os el y tie d to w
n ey is
sp ec ul at iv e m o ti ve fo r h o ld in g m o hich di d he belie ve to be th e
8. T he by K ey ne s's, w
o ti ve s fo r h o ld in g m o n ey su gg es te d
9. Oft he f h ree m
te re st ra tes ? n:
mosr se nsir iv e to in it y pr ef er en ce , ve locity in creases whe
li qu id
ey n es ' th eo ry o f to interest rates. W
hy?
10. ,.\ cco rdin g to K for m on ey is in se ns iti ve
lo M ilt o n F ri ed m an , th e d em an d
11. r\cco rd in g t?
\I = PY . w h at d o es M re p rese n
nM o ney?
12. In rhe eq ua l io ,·es ar e th er e for holding m periodof
ey ne s. h ow m an y m o ci
r· . tr10 1·a stipulated
l( d
13. Accordi ng lo .
. st ru m e n ts ca rr y m g so me 1xe ra te
fi o mtei es
. .
14· ~, n n a l In " )
h c1 rn r f he (1n a re resr and \
i fone ,r .
10 . t In ..
f
time.
G en er al T h eo r: · o £ mp >j ,men '. ffected onh· br re/a 11, e
, . h e bo o k "T h e .
15· \\ ho 1s rhe aw h o r o fr d su pp l: · of gooc are a
5
d an
. s rh a t th e d em an
16· \\ 'hrch p ri n ciple sw te
prices . fo r money foncrion
.
.1ch o f d em an d
.. •I " " " ·n
 Macroeconomics

J 8. Write neo-classical a pproach of demand for mo ney function .

19 _ W h al is th e natu r e o f re latio nship be I wee n money d ema nd for transactio ns purpose and th e
leve l of incom e?
20. What is the nature of relati o nship between money demand for precautionary motive and th e
leve l of in come?
21. What is the nature of relationship between money demand for speculative purpose and the
int erest rate?
Ans. I. Lipsey and Chrystal, 2. Derived demand, 3. MV = PT, 4. M = KY, 5. Transactions Motive,
G. Ratio of Human Wealth and Non-human Wealth, 7. Wealth of the Community, 8. Store of
wealth , 9. Speculative motive, 10. lnterest rates increase, 11 . Competition among banks
keeps the opportunity cost o f holding money relatively constant, 12. Money supply, 13.
Three, 14. Bonds, 15. J.M . Key nes, 16. Ho moge ne ity principle , 17. Md = f(Y) , 18 . M = KY,
19. Direct, 20. Direct, 21. Inverse

Chapter-11 IS-LM Analysis

1. If I is Investment; la : Autonomous investment; r: Rate of interest; b: Responsive ness of

investment expenditure to the ra te of interest, then write the fun ctional relationship between
investment a nd rate of interest.
2. What is the n ature of slope of the LM curve?
3. T he LM curve will shift down when the real money demand :
4. A decrease in money demand causes the real interest rate to:
5. Changes in th e rate of interest impact the real GDP via:
6. It is the locus of comb inations of real GDP and rate of interest.
7. Mention any o ne p arameter impacting slope of is curve.
8. An incr ease in a uto n o mo us investment expend iture shifts the IS cu rve to the:
9. Equilibrium in money market implies a situation where increase in GD P is associated "'ilb
increase in rate of interest via increase in:
10. Slope of LM curve is upward sloping. indicating a positive relatio nship between real GDP
anrl:
.
Ans. l . I = Ia - br ( b > 0) , 2. LM curve slopes upward. 3. Declines. . 1se , ::>- . I 1,,·estmen•L
4. R.
expendit ure, 6. IS curve. 7 . Value of multiplier. 8. Rig ht. 9 . De mand fo r money. 10. Intere~r
rail'.
 . lion of Aggregate Demand Curve from
Chapter-12 oenva IS-LM Model
- . .11 ha fJpe n to the inte rest rate in the.:
JS I I sho rt run whe n gr,vernm e nt
I. In rI 1c • , M n1o dcl, w i,ll w1
spen ding ri~es ?
.. . .
, JS-L M m ocIc 111ide r th e usu
·I al con d1u ons 1n a dosc.:d c.:conorny,
2. In th e . an mcr ease in
d' .. cre· lses the 111t c1-csl rale and
gover nmc n t· spcn ing in < . crow ds oul :
. .
. . _. b twe en JS and LM cur ves, 1fp nce le ve .
3. Give n e qu1lib1 llllll e l 1ncr casc s, LM curv e shifts Lo th e:
4. In IS-LM ana 1ys1·s, w hal will be the imp act of pric e incr ease on real GD P?
· wha t will be the imp act of pric e
5 _ Jn IS-LM a na 1ys1s, < incr ease on inte rest rate ?
.
6. An mcr · gov ern m ent siJe ndi ng cau ses th e equ
ease 111 ilib rium leve l of agg re gate out put to·
·
7. lAT
Vl
hen taxes increase , th e IS cur ve shif ts
to th e:
_ It is th e rati o of cha nge in e qui libr ium
8 real GD P (?Y) to th e ch a nge in real mon
ey sup ply ?
(Ms/P).

Ans. l . Rises, 2. Inv estm e nt, 3. Le ft, 4 . Low er leve l ofre al GDP, 5 . Rise , 7. Lef
t, 8. Mo neta ry poli cy
mul tipl ier.

Chapter-13 Aggregate Demand and Aggregat

e Supply Analysis

I. It is th e tota l qu a ntit y of an eco nom y's

fina l goo ds and serv ices dem and ed at
diff ere nt price
leve ls.

2. T he tota l qua ntit y of fina l goo ds and

serv ices offe red for sale at diff ere nt
price leve ls is:
3. Wha t is the sha pe of th e Key n esia n
sho rt run agg reg ate sup ply cur ve?
4. Wha l is th e ca use of Key n esia n p e rfec
tly e last ic Agg reg ate Sup ply cur ve?
5. What is th e hor izo ntal axis of the agg
reg ate d e ma nd cur ve?
6- Wha
l is the ve rti cal ax is of the agg reg ate
dem and cur ve?
7
· Whe n the price level is hig h, wh at
is agg reg ate d e ma nd ?
1
ls. ·Agg rega te d e m a nd sc h e dul e, 2. Agg
r ega te sup ply c urv e, 3 . Hor izo nta l st
4. Wao0-e p .· raig hl line ,
.· ·d·
l 1Ce i1 g 1 n y& co n sta ntm arg . ,..
ma lpr odu cto fla bou r, :J. 0 utp ut or · co me 6. Price
leve l, 7. Low m ·

9 ■
 Chapter-14 Inflation

J. ,, is th e state in which the value of money decreas es

2 . When there is hi gh inflatio n in the econom y how , rill ·t er h

eco nom yr , ' 1 auect t e suppl)' of .
money in the
3. Mentio n an y on class of people which will not be neo-atively affecte d b)' th h' h
• fl .
ti e 1g er m at1on.
4. Whi ch concep t is just opposi te to inflatio n?

5. Mentio n any one cause of deman d pull inflatio n.

6. Mentio n any one cause of cost push inflatio n.

7. Real Interes t Rate = Nomin al interes t rate - ?

8. This one-to -one relatio nship betwee n the rate of inflatio n and the interes t rate
is known as

Ans. 1. Inflatio n, _2. Supply of money increas es, 3. Busine ss class, 4. Deflation, 5. Deficit
Financing,
6. Increa se m the wage rate, 7. Inflatio n rate, 8. Fisher Effect.

Chapter-15 Unemployment

1. It is the ratio of numbe r of person s unemp loyed to the size oflabo ur force.

2. Mentio n any one type of unemp loymen t found in India.

3. What is the formul a to find labour force partici pation rate?

4. Worke rs tempor arily unemp loyed but who normal ly find jobs quickly are called:

5 Worke rs who are unemp loyed becaus e they lack the skills needed by employ
ers are called:
6. It is the rate of unemp loymen t that exists even when the labour market is in equilib
rium.
7. If a person is ready to work at the prevail ing wage rate in the market , but he is unable to
find
the work , then what type of unemp loyme nt would it be called?

8. Which type of unemp loymen t has the margin al produc tivity of the worker s as
zero?
9. What is th e right formul a to know the unemp loyme nt rate?

10. Me ntion an y one cost of unemp loymen t.

• 10
 O n e W or d An sw
er Ty pe Q ue st io
ns

11. ,1•11e un en 1p 1oy tn cn l o f· a .

p e ts • ,,,
·, lie n h e/ sh e is in m id st of tr a ns
" ()t,
fo r ne w jo b co m es un de r th e w . iti ng be t.w ee n ·1ohs sc
hi ch o f I h e fo l\o w
m g ca te go ry ? • ' · arch in trn
l. U ne m pl oy m en
t. ra te , 2. St ru ct ur
t OO, 4. Fr ic ti on al nl U ne m pl oy m e
l y un e m pl oy ed , nt , 3 . (W or kf or ce
5. (f ot al Po p ul at. io n)
un e m pl oy m e nt . 7 St ru ct ur al ly un e m pl x
. In vo lu nt a r y un e oy e d, 6 . N at ur al
p e rs on s un e m pl oy m pl oy m e nt , 8. D ra te of
ed /S iz e o f la bo ur is gu ised un e m pl oy
fo rc e) X 10 0, l m e nt , 9. (N um be r of
11 nc m pl oy e m e n t . 0. L os s of o ut pu
t, l 1. Fr ic tio na l

Ch apter-16 Inflation -
Unemployment Trad
e-off and Phillips Cu
rve
I . ..\.11 em pi ri ca l re la
ti on sh ip be tw ee n
th e ra te of un em pl
mon ey w ag es : oy m en t a nd th e ra
te of in crea se in
2 _ T he Ph ill ip s C ur ve is a gr
a ph ic al de pi ct io n
and: of th e ne ga ti ve re
la ti on sh ip be tw ee n
in fla tio n
3. W h at do es th e
lo ng -r un Ph ill ip s C
ur ve in di ca te ?
4. If we de si re to ha
ve lo w er ra te of un
em pl oy m en t, w e m
of: us t be pr ep ar ed to
ac ce pt a hi gh er ra te
5. Betwee n sh or t-ru
n an d lo ng -r un , in
un em pl oym en t ex is w hi ch ti m e ho ri zo
ts . n th e tr ad e of f be tw
ee n in fl at io n a nd
6. M en tio n an y on
e ca us e of W ag e St
ic ki ne ss .
7. Money ha s no ef fe
ct on ou tp ut , em pl
wo ul d it be ca lle d? oy m en t an d ag gr eg
at e de m an d in th e
lo ng ru n. W ha t
8. Who has de ve lo pe
d au gm en te d Ph il
li ps cu rv e?
9. It shows th e re
la ti on sh ip be tw ee
un em ploy m en t ra te n in fl at io n ad ju st
. ed w it h its ex pe ct
ed ra te , an d th e
Ans. l. Phillips C ur
ve , 2. U ne m pl oy
m en t, 3. T he re
un em pl oy m en t, 4. is no tr ad e of f be
In fl at io n, 5. S ho tw ee n in fl at io n an
rt -t er m , 6. Im pe rf ec t In d
in oney, 8. M ilt on F ri fo rm at io n, 7. N eu
ed m an an d E dm ud tr ality of
Ph el ps , 9. A ug m en
te d Ph il li ps C ur ve
.

Chapter-17 Theories of
Trade Cycle
l. Du rin
· o- b .
2. \Vh 0 Usin ess
ey e 1es , w ha t 1s
·
th e op po si•te of a
at ar e th . tr ou gh ?
e tu rn i ·
ng po in ts o f th e bu .
si ne ss cy cl e?
 3. vVhat is high est poin t of busi ness cycle called?
ploy men t is almo st zero?
4. In v,,hic h phas e of busi ness cycle invo lunt ary unem
e of busi ness cycle?
5. The econ omy is said to be over heat ed in whic h phas
in whic h phas e of business cycle?
6. The re is large scale of invo lunt ary unem ploy men t
fall in emp loym ent, fall stock prices, etc. are
7. Fall in the level ofin vest men ts, fall in prod uctio n,
foun d duri ng whic h phas e of busi ness cycle?
level of econ omic activity?
8. vVhich is the seve re form of rece ssion with lowest
ism in which phas e of business cycle?
9. The re is end of pess imis m and the begi nnin g of optim
n, 5. Peak , 6. Con tract ion , 7. Cont racti on,
Ans . 1. Peak , 2. Peak and Trou gh, 3. Peak, 4. Expa nsio
8. Trou gh, 9. Trou gh.

Ill