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Production Account Dr. Wages and salaries Dividends Retained profits Profit tax Excise tax Required to compute: GDP at factor cost Rs in crore 200 40 50 10 20 Sales to households Fixed investment Net change in inventories Exports Imports

Cr. Rs in crore 250 20 20 50 -20

(Ans) GDP at factor cost = Wages and salaries + Dividends + Retained profits + Profit tax = 200+40+50+10 = 300 2. The following is the information from the national income accounts for a country XXX. Rs in crore National income 3,850 Government purchases 930 Consumption 3,000 Net investment 300 Gross investment 800 GNP 4,800 Personal tax & non-tax payments 600 Transfer payments 510 Net interest 120 Government budget surplus 30 Dividends 100 Proprietor’s income & rental income of persons 320 Wages & salaries 2,920 Required to compute: a) Net indirect tax b) Taxes – transfers c) Personal income d) Net exports

(Ans) (a) Net indirect taxes = NNP at market prices – National income Or, Indirect taxes – subsidies = (GNP at market price - depreciation) – National income = GNP at market price – (GI-NI) – National income (where, Gross Investment (GI) – Net Investment (NI) = Depreciation) = 4800 – (800-300) – 3850 = 4800-500-3850 = 450 (b) Taxes – transfers = Government purchases + budget surplus = 930+30 = 960

Rs in crore Net investments 450 Gross investment 1200 GNP 7200 Consumption 4500 Personal tax & non-tax payments 900 Transfer payments 780 Net interest 180 Government purchases 1440 National income 5775 Government budget surplus 45 Dividends 150 Proprietor’s income 480 Wages 4380 Required to compute: a) Corporate profit b) NNP c) Disposable Personal income d) Personal savings (Ans) (a) Corporate profits = National income – (wages + proprietor’s income + net interest) = 5775 – (4380+480+180) = 735 (b) NNP = GNP – Depreciation Depreciation = Gross investment – Net investment = 1200-450 = 750 NNP = 7200 – 750 = 6450 (c) Personal disposable income = personal income – personal taxes Personal income = (national income – corporate profit) + transfer payments + dividends = (5775 -735) + 780 + 150 = 5970 Personal disposable income = 5970 – 900 = 5070 (d) Personal savings = personal disposable income – consumption = 5070-4500=570 4.023 Indirect taxes 14. The figures given below pertain to the year 19x0-x1.(c) Personal income = (Wages + proprietor’s income + Net interest + dividends + transfer payments) = 2920+320+120+100+510 = 3970 (d) Net exports = GNP – (C+I+G) = 4800-(3000+800+930) = 70 3.723 . All figures in Rs crore GNP at factor cost 95. The following is the information from the national income accounts for country XXX.

The following is the information from the national income accounts for a hypothetical country: Rs in crore GNP at market prices 2400 Gross investment 400 Net investments 150 Consumption 1500 Government purchases of goods & services 480 National income 1925 Wages & salaries 1460 Proprietor’s income + rental income of persons 160 Dividends 50 Government budget surplus 15 Interest 60 Transfer payments 260 Personal tax & non-tax payments 300 Required to compute: a) NNP at market prices b) Net exports c) Net indirect taxes d) Corporate profits e) Taxes – transfers f) Personal income g) Disposable personal income h) Personal savings (Ans) (a) NNP = GNP – Depreciation = 2400 – 250 = 2150 .575 GNP at market prices 1.00.07.422 NNP at market prices 1.00.NDP at market prices 1.226 Compute the values of: a) Depreciation b) Net factor income from abroad c) Subsidies d) NDP at factor cost (Ans) (a) Depreciation = GNP at market prices – NNP at market prices = 107226 – 100575 = 6651 (b) Net factor income from abroad = NNP at market prices – NDP at market prices = 100575 – 100422 = 153 (c) Subsidies = GNP at factor cost + indirect taxes – GNP at market price = 95023 + 14723 – 107226 = 2520 (d) NDP at factor cost = NDP at market prices – Indirect Taxes + subsidies = 100422 – 14723 + 2520 = 88219 5.

25Y) + 450 – 12i + 300 + 225 – (5+0.20Y Speculative demand for money Ma = 145 – 60i Supply of money Ms = 300 Exports E = 225 Import function M = 5 + 0.2Y a) Derive the IS & LM curves b) Calculate the equilibrium income and interest rate c) Calculate equilibrium trade balance & budget deficit d) What is the change in equilibrium investment if there is an autonomous decrease of 50 in money supply? e) What is the change in transaction demand for money if there is an autonomous increase of 50 in money supply? (Ans) (a) IS Curve: Y = C+I+G+(E-M) = 15 + 0.2Y) = 985 + 0.4Y – 12i Y = 1642 – 20i LM Curve: Demand for money (Md) = Mt + Ma = 0.20Y + 145 – 60i or. Consumption function C = 15 + 0.8 (Y–0.20Y + 145 – 60i Supply of money (Ms) = 300 At equilibrium Md = Ms or. The following equations are applicable to an economy. Y = 775 + 300i (b) Equilibrium income .Depreciation = Gross Investment – Net Investment = 400 – 150 = 250 (b) Net Exports = GNP – (C+I+G) = 2400 – (1500+400+480) = 20 (c) Net Indirect Taxes = NNP – National income taxes = 2150 – 1925 = 225 (d) Corporate profits = NI – (wages & salaries + proprietor’s income + rental income + net interest) = 1925 – (1460+160+60) = 245 (e) Taxes – transfers = Gross purchases + Budget Surplus = 480+15 = 495 (f) Personal income = National Income – Corporate profits + transfer payments + dividends = 1925 – 245 + 260 + 50 = 1990 (g) Personal disposable income = personal income – personal taxes & non-tax payments = 1990 – 300 = 1690 (h) Personal savings = Personal disposable income – consumption = 1690 – 1500 = 190 6. 300 = 0.80Yd Disposable income Yd = Y – T Tax function T = 0.25 T Investment function I = 450 – 12i Exogenous government expenditure G = 300 Transaction demand for money Mt = 0.

i = 2.08 7.IS=LM 1642 – 20i = 775 + 300i or.49) = 408.5 When autonomous money supply decreases by 50 then the new LM curve is: 250 = 0. (All macro aggregates are in million units of currency and interest in terms of percent per annum) Savings function (S) -60 + 0. i = 3.5 = .93% Y = 1642 – 20 (1.68 – 317.71% Substituting i = 2.20Y = 0.9.25Y = 300 – 0.93) = 1603.25 (1588) = 300 – 397 = -97 = Budget surplus (d) Original equilibrium investment = 450 – 12Y = 450 – 12 (2.2Y Investment function (I) 1000 – 15i Exogenous government expenditure (G) 800 Import function (M) 20 + 0.20 (1588) = 317. i = 1.2Y + 145 – 60i or. Y = 1642 – 20 (2. Y = 525 + 300i Equilibrium interest rate: 1642 – 20i = 525 + 300i or.71% in IS curve.49% Investment = 450 – 12 (3.2Y Speculative demand for money (Ma / P) 130 – 44i Money supply (Ms / P) 450 a) Derive IS & LM curves b) Compute income.40) = 320. The following relations are derived for an economy.71) = 1588 (c) Equilibrium trade balance = exports – imports = 225 – 5 – 0.71) = 417.25Yd Disposable income (Yd) Y–T-R Transfer payments (R) 80 Tax function (T) 0.6 Change in transaction demand for money = 320.6 Budget deficit = G – T = 300 – 0.20Y + 145 – 60i or. 867 = 320i or.2 (1588) = . trade balance and budget deficit at equilibrium . interest rate.6 When autonomous money supply increases by 50 then the new LM curve is: 350 = 0. Y = 1025 + 300i At equilibrium: 1642 – 20i = 1025 + 300i or.6 = 3.2Y = 225 – 5 -0.97.40 Transaction demand for money = 0.20 (1603.10Y Export function (E) 400 Transaction demand for money (Mt / P) 0.38 (e) Original transaction demand for money = 0. 617 = 320i or.12 – 417.12 Change in equilibrium investment = 408.

0. wants to keep the budget deficit at the minimum without affecting the equilibrium level of income & interest rate in the economy.50Y-15i or. Y = 1600 – 220i or.2(4240)} = 32 (c) If the govt. there is no change in demand for money or supply for money.2Y = 130 – 44i – 450 or. what course of action would you suggest? (Ans) (a) IS Curve: Given savings function (S) = . expenditure is increased by 125. simultaneously increasing the govt. Y = 1600 + 220i (b) Economy is in equilibrium when goods market and money market are in simultaneous equilibrium.5Y = 2300 – 15i or. .5Y = 2300 + 125 – 15i or. Y = 4600 – 30i LM Curve: Equilibrium in money market (LM Curve) will be: Supply of money = Demand for money Ms / P = (Mt / P) + (Ma / P) or.10Y = 2300+0. the transfer payments should be reduced to zero. .75Yd Equilibrium in goods market (IS Curve) will be: Y = C+I+G+(E-M) = 60+0. budget deficit will decrease by 20. Thus. Thus. 450 = 0. LM curve remains the same. what will be the new equilibrium income? e) If the investment is desired to be maintained at the original level in spite of an increase in the government expenditure as in (4) above. 0. Y = 4850 – 30i Since. 4600 – 30i = 1600 + 220i or. expenditure + Transfer payments) – Taxes = (800+80) – {0. (d) If the exogenous govt. the new IS curve will be: 0.25Yd Consumption function (C) = 60 + 0. 250i = 3000 or.60 + 0.2Y+80)+1000-15i+800+400-20-0.2Y = 320 + 44i or. i = 12% Substitute the value of in IS Curve: Equilibrium income Y = 4600 – 30 (12) = 4600 – 360 = 4240 Trade balance = exports – imports = 400–{20+0.0.75(Y-0.75 (80) = 60.2Y + 130 – 44i or. what course of action would you suggest? d) If the exogenous government expenditure is increased by 125. Y = 4600 – 30i or. expenditure by 0.c) If the government wants to keep the budget deficit at the minimum possible level without affecting the equilibrium level of income and interest rate in the economy.1(4240)} = -44 = trade deficit Budget deficit = (Govt.

demand for money should be equal to supply for money. Then from the IS curve the equilibrium income will be: Y = 4850 – 30 (12) = 4490 In the money market demand for money will be: {0. the equilibrium interest should be maintained at the original level of 12%. money supply should be increased to 500. i = 13% New equilibrium income = 4850 – 30 (13) = 4460 (e) Original investment = 1000 – 15 (12) = 820 If the investment is to be maintained at the same level even after an increase in the govt. _____________________ .2 (4490)} + 130 – 44 (12) = 500 At equilibrium. expenditure. So.Y = 1600 + 220i At equilibrium: 4850 – 30i = 1600 + 220i or.