IS-LM Framework

MODULE 6
Past question Paper – 2020-21
• In March 2020, India announced a Rs 1.7-
lakh-crore relief package to take care of poor,
workers and those who needed immediate
help amid a lockdown to combat the
coronavirus pandemic. The Pradhan Mantri
Garib Kalyan Scheme, which covered 80 crore
poor people, included cash transfers and food
security, Finance Minister Nirmala Sitharaman
had said at a press meet in New Delhi. The
scheme also focused on giving payments to
different sections of the society directly into
their bank accounts. This covered farmers,
workers under the Mahatma Gandhi National
Rural Employment Guarantee Scheme, widow
pensioners, disabled, women with Jan Dhan
accounts, women running self-help groups,
beneficiaries of the Employees’ Provident
Fund Organisation and construction workers.
Questions:
• a) Using the information given in the caselet and the diagram above,
explain what is likely to happen in the economy due to the Rs 1.7-
lakh-crore relief package announced by the Government of India in
March, 2020. (2 marks)
• b) Using the diagram above, explain why does income or output
increase from OY1 to OY3 instead of OY1 to OY2? Can this be
prevented? If yes, explain how. (3 marks)
Case study2018-2019
• Following the 1990 unification of west Germany and East Germany, the German government
sharply increased government spending and transfers in order to revive eastern Germany. The
German central bank (Bundesbank) saw these developments and feared that they would
result in inflation. The Bundesbank concluded that economic activity should be slowed and
adopted accordingly a tight monetary policy. In fact, due to its financial leadership the
Bundesbank was accused of forcing interest rates to higher levels than they might otherwise
have been in Europe as well as in the rest of the world.
• 1. Using the lS-LM framework explain what happens to the equilibrium level of output and
interest rate when the German government sharply increased government spending?
(4marks)
• 2. An expansionary fiscal policy leads to Crowding Out Effect; . Explain the concept of Crowding
Out Effect. (3
marks)
• 3. In the context of IS-LM model suggest a suitable policy that should be adopted in order to
avoid the Crowding Out Effect. Do you think that policy adopted by the Central Bank of Germany
is the same as the one that you recommend?
(3 marks)
2021-22
Questions: