MACRO ECONOMICS(Answers)

Q1) Discuss the relative effectiveness of Fiscal policy and Monetary

policy.
Ans:-National Income-1 pdf
Q2) Derive IS curve?
Ans:-National Income-2 pdf
Q3)Derive LM curve?
Ans:-National Income-2 pdf
Q4) Derive Aggregate demand curve through IS-LM model?
Ans:-
To derive the aggregate demand (AD) curve using the IS-LM model, we need to
find the equilibrium values of output (Y) and the interest rate (r) by solving the
IS and LM equations simultaneously. Once we have the equilibrium values of Y
and r, we can plot these points to obtain the AD curve, which shows the
relationship between the price level (P) and the equilibrium level of output (Y)
in the economy.
1. IS Curve: S(Y) = I(r)
2. LM Curve: L(Y, r) = M/P
At equilibrium, the output level (Y) and interest rate (r) satisfy both equations
simultaneously.
Let's denote the equilibrium output as (Y*) and the equilibrium interest rate as
(r*).
We can find these equilibrium values by solving the IS and LM equations
simultaneously:
S(Y*) = I(r*)
L(Y*, r*) = M/P
Once we have (Y*) and (r*), we can plot these points on a graph with the price
level (P) on the vertical axis and output (Y) on the horizontal axis. This will give
us the aggregate demand curve.
Here's how to derive the AD curve step by step:
1. Find Equilibrium Output (Y*) and Interest Rate (r*): Solve the IS and LM
equations simultaneously to find the equilibrium values of output and the
interest rate.
2. Plot Equilibrium Points: Once you have found (Y*) and (r*), plot these points
on a graph where the horizontal axis represents output (Y) and the vertical axis
represents the price level (P).
3. Aggregate Demand Curve: Connect the equilibrium points with a downward-
sloping line. This line represents the aggregate demand curve, showing the
relationship between the price level and the equilibrium level of output in the
economy.
The aggregate demand curve derived from the IS-LM model reflects the inverse
relationship between the price level and the equilibrium level of output,
consistent with the downward slope of the AD curve in traditional
macroeconomic analysis.

Q5) Derive Aggregate Supply curve by using CKM (Complete

Keynesian Model)
Ans:-
Q6) Compare Government expenditure multiplier between SKM
(Simple Keynesian Multiplier) with IS-LM model
Q7) Compare Tax multiplier between SKM (Simple Keynesian
Multiplier) with IS-LM model
Q8) Compare Balanced Budget multiplier between SKM (Simple
Keynesian Multiplier) with IS-LM model
Answer for the above three questions
Q12) Write a short note on Paradox of Thrift?
Ans: -
Formal Definition:

The Paradox of Thrift is an economic concept that suggests an increase in saving by

individuals, while beneficial at the individual level, can lead to reduced aggregate
demand and economic contraction when practiced collectively across the entire
economy. It highlights the potential contradiction between individual saving
behavior and its aggregate economic effects, emphasizing the interdependence of
economic actors.

Explanation:

Imagine you and your friends all decide to save more money by spending less.
Individually, it seems like a smart idea because you're building up your savings. But if
everyone in your town starts saving a lot and spending less at the same time, it
means businesses are selling fewer things. This can lead to them cutting back on
production or even laying off workers. As a result, fewer people have money to
spend, and the economy slows down. So, while saving money is good for you, if
everyone does it too much, it can actually make the economy worse off instead of
better. It's like everyone trying to save but ending up hurting each other's ability to
earn and spend.

2 Marks Questions:-
Q1) State the difference between GNP and NNP.
Ans:-
Q2) Define Marginal Propensity to save (MPS).
Ans:-

Q3) What is Investment Multiplier in SKM?

Ans:-

Q4) What is Transaction demand for money?

Ans:-
Transaction demand for money refers to the need for cash or funds in checking
accounts to facilitate everyday transactions like buying goods and services or
paying bills. It arises from the desire for quick and convenient payment
methods. Factors influencing it include economic activity levels, income,
technology, payment habits, and interest rates. Central banks consider
transaction demand when formulating monetary policy to maintain price
stability and support economic activity.
Q6) What is Speculative demand for money?
Ans:-
The speculative demand for money refers to holding money not for
transactions but as a store of value or for investment purposes. It arises when
people anticipate higher future interest rates, prefer safety in uncertain times,
speculate on asset price declines, or aim to avoid transaction costs. This
demand fluctuates based on expectations about interest rates, economic
conditions, inflation, and investor sentiment. Policymakers monitor speculative
demand as it affects asset prices and the effectiveness of monetary policy.

Q7) What do you mean by Fiscal Policy?

Ans:-

Q8) What do you mean by monetary policy?

Ans:-
Q9) Which curve represents fiscal policy in IS-LM model?
Ans:-

Q10) What is the value of Balanced Budget Multiplier in IS-LM

model?
Ans:-

Where
S(saving)-> Function of disposable income
I(Investment)->Function of rate of interest
L(Demand for money)->Function of rate of interest and level of
income.
Q11) What is Paradox of Thrift?
Ans:-Repeated question refer from above
Q12) What is Real Income?
Ans:- Real income is a measure of an individual's or household's purchasing
power adjusted for changes in the general price level, typically expressed in
terms of the quantity of goods and services that can be purchased with a given
nominal income. It represents the actual amount of goods and services that
can be acquired with income after accounting for inflation or deflation,
providing a more accurate assessment of the individual's or household's
standard of living.

Q13) What are the differences between GDP and GNP?

Ans:-

Q14) What is GDP at market price?

Ans:- Gross Domestic Product (GDP) at market prices is the total value of all
goods and services produced within a country's borders during a specific time
period, usually a year, calculated based on the prices that these goods and
services are sold for in the marketplace.
In simpler terms, it's like adding up the value of everything produced within a
country—like cars, groceries, haircuts, and computer services—and counting
how much money all those things are sold for. This measure helps us
understand the size and health of a country's economy by looking at the total
value of its production and sales.

Q15) What is GDP deflator?

Ans:-
The GDP deflator is a way to measure changes in prices in the economy over
time. It compares the current prices of all goods and services produced in a
country to a base year's prices. By looking at how prices change from year to
year, we can understand if the overall level of prices in the economy is
increasing or decreasing.So, the GDP deflator helps economists and
policymakers understand how inflation or deflation is affecting the economy
and how the purchasing power of money is changing over time.

Q16) What are the different factors observed as the leakages in

Circular Flow Income?
Ans:- Saving and import
Q17) What do you mean by Net Indirect Tax?
Ans:- Net indirect tax is essentially the difference between indirect taxes
collected by the government on goods and services (like sales taxes or value-
added taxes) and subsidies given to producers. So, when we talk about net
indirect tax, we're looking at how much money the government collects from
these taxes on goods and services, minus the money it spends on subsidies to
help producers. It gives us an idea of whether the government is making
money from taxes on goods and services or spending money to support
producers.

Q18) What do you mean by Real GDP?

Ans:- Real Gross Domestic Product (GDP) is a comprehensive economic
measure used to quantify the total value of all final goods and services
produced within a country's geographical borders over a specified time period,
typically a year. Real GDP serves as an inflation-adjusted metric, reflecting
economic output in terms of constant prices of a chosen base year. It
represents the aggregate economic activity of a nation, factoring out the
influence of price changes, thus providing a reliable indicator of true economic
growth or contraction over time.

Q19) Mention two Income which is not taken into calculation of

National Income?
Ans:-Services of housewives, Capital gains.
Q20) What is depreciation?
Ans:- Depreciation is the loss of value of fixed assets in use on account of
(i)Normal wear and tear
(ii)Normal rate of accidental damages
(iii)Expected obsolescence
Depreciation is also called consumption of fixed capital. Replacement of fixed
assets requires a provision for fund. This profession is estimated on annual
basis, that found is known as depreciation cost.