SVKM'S NMIMS

SARLA ANIL MODI SCHOOL OF ECONOMICS

Academic Year: 2019-2020

Program: M.Sc.Economics Year: I Semester : I

Subject: Macroeconomic Theory -I Batch: 2019-21

Date: 13th )anuary, 2020 Time: 01:00 pin to 03:00 pin (2 hrs.)
Marks: 50 . No. of Page`s:i
Re - Examination

Instructions:
1 . Attempt any Five questions
2. Figures to the righi indicate maximum marks.
3 . A:nswer each question on a fresh page

1.

a. Discuss the implications of equilibrium in an economy under the IS-LM

model for an increase in Non-borrowed reserves for the following situations.
i. Economy is below full employment

ii. Economy is at full employment

b. Although saving and investment are equal ex-post, economic theory leaves

plenty of room for an ex-ante saving glut. Discuss this statement with possible
reasons for the relationship.

(6+4 -10)
2. The third bi monthly monetary policy review of Monetary Policy Committee (MPC)
in August 2019, decided to reduce the policy repo rate by 35 bps and keep the stance
accommodative. They gave the following rationale for the policy action.
a. Inflation expectations of households remained unchanged in the July 2019
round of the Reserve Bank's survey for the three months ahead horizon as
compared with the previous round, but they moderated by 20 basis points for
the one year ahead horizon.
b. MPC has enacted both "insurance-cuts" and "data-dependent" cuts in the
February-June window.

C. Globally, central banks have not only been dovish in their stance but have also

cut their policy rates.

Discuss these observations in the context of the MPC's decision

(10)

4/2
3.

a. Prove that when the degree of monopoly value is zero, equilibrium labour
demand would be at the equality between real wages and marginal product of
labour.

b. Show that under Keynesian assumptions, an increase in the price level raises
the level of employment in the labour market.

(5+5 -10)
4. Using the Solow growth model, prove that the condition for maximum sustainable

consumption requires that the slope of the production function equals the amount of
capital stock required to keep the capital stock per capital constant.

(10)

5. Discuss implications of devaluation of currency when the economy have following

characteristics;

a. The economy is a small open economy and having a stabilized rate of interest
b. Income is not stabilized by the government

(10)

6.

a. Diagrammatically show the implications of following on money supply in the

economy:
i. Increase in required reserve

ii. Open market sales

b. Assuming that the economy is in a liquidity trap, and the central bank
undertook an open market sale, discuss the implications the said monetary

policy on the ouq)ut in the economy, given that the money multiplier is 7#.
(7+3)