IBS PGPM Program Summer Term Examination - May-2013 Semester | J] | Course | Macroeconomics & Business Environment Program Course Code PGPM SLEC502 QUESTION MR BOOKLET CODE COURSE CODE [ a | [| To be filled by the candidate awnowero. [1 1 11..LLLL CANDIDATE CAN RETAIN THE QUESTION BOOKLET AFTER THE EXAMINATION question booklet comprises of Part A, Part B & C: Part i. Part A consists of 30 multiple choice questions which test your understanding of basic concepts in the subject. ji, Part A to be answered in OMR sheet provided to you separately. Detailed instructions for answering are given on OMR sheet and also overleaf ii, Time allotted for answering Part A is 30 minutes. Part B & C: iv. Part B consists of Problems testing, Conceptual Understanding and Application, Analytical Ability, Caselets, Situational Analysis / Applications of concepts. v. Part C consists of case analysis. vi. Total time allotted for answering Part B & C is 2% hours. Note: vii, Both Parts B & C will be answered in a SINGLE ANSWER BOOKLET. ©1Bs -2013SLEC502 MEBE (A)/0513 Part A: Basic Concepts TOTAL MARKS: 30 Which of the following is true if prices of all the goods and services in an economy increase in a year? a. Real GDP will increase b. Nominal GDP will increase Real GDP will increase more than ‘nominal GDP . Real GDP will fall in proportion to the increase in prices fe. Nominal GDP will be unable to capture the effects of the increase in prices. Inflation accompanied by a slowing of economic activity is a. Known as defiation Aresult of a stagnant aggregate supply A result of fiscal stimulus Known as stagflation Known as a recession. In a deflationary period, the appropriate policy for the RBI would be to a. Buy government securities in the open market b. Discourage commercial banks to increase their loans c. Increase Cash Reserve Ratio d. Increase bank rate @. Reduce the credit to government, The value-added approach to GOP measurement a. Adds up the difference between the value of output and costs of intermediate goods b. Adds up all income received by the household sector in the economy c. Removes the effect of inflation from the nominal GDP d. Adds up alll the expenditures incurred MAXIMUM TIME: 30 Minutes on the goods and services produced by the domestic sector fe. Adds the total money value of goods and services purchased by their Ultimate buyers, The slope of the consumption function represents a. Average Propensity to Save b. Marginal Propensity to Consume ©. Marginal Propensity to Save d. Average Propensity to Consume fe. None of the above The balanced budget multiplier is not affected by a. Marginal propensity to save b. Marginal propensity to import Investment function of the economy d Proportional income tax rate levied by the govt Both (a) and (b) above ° Compute GNP at market prices. GOP at factor cost Net income from abroad Indirect taxes Subsidies a. RS.1740 cr. b. RS.1658 cr c. RS.2282 cr dg. RS2342 or e. RS.3002 erSLEC502 MEBE (A)/0513 8 10. "1 12, Which of the following best describes the bank rate? a. The rate at which the central bank discounts foreign bills b. The rate at which the central bank discounts the government's bills. c. The rate at which the central bank discounts the commercial bank's bills d. The rates at which loans are given to costumers by commercial banks. fe. The rate at which deposits are mobilized by commercial banks. Which of the following is not a stock variable? a. Foreign exchange reserves b. Public debt ©. Wealth of a country 4. Inflation Money supply Net factor income from aboard is equal to a. NNP at market price - NDP at market prices b. NOP at market price ~ Indirect taxes + Subsidies ¢. NDP at factor cost + Depreciation NOP at factor cost ~ Depreciation e. NNP at market price + Depreciation If speculative demand for money does not depend on interest rate, then a. LM curve will be vertical b. LM curve will be horizontal c. IS curve will be vertical d. 1S curve will be horizontal fe. Nochange The LM curve shows a. A positive relationship between rate of interest and level of income b. Anegative relationship between rate of interest and level of income 8 14. 16. 16. A negative relationship between rate of interest and level of investment d. A positive relationship between rate of interest and level of investment eA positive relationship between level of investment and level of income The difference between M3 and M1 is a. Demand deposits Post office savings deposits Savings deposits Time deposits M2 Given MPC = 0.75 and beginning from a position of equilibrium, investment rises by Rs.500 core. The AY that will bring the ‘economy back to equilibrium is a. Rs.1000 crore Rs.200 crore Rs.300 crore Rs.2000 crore Rs.2, 500 crore Which of the following would be a liability of a commercial bank? ‘a. Deposits in the bank b. Loans made by the bank to individuals c. Loans made by the bank to other banks Bonds purchased by the bank e. Investments made in mutual funds A tax is progressive if a. Percentage of income paid as taxes increases as income increases b. Percentage of income paid as taxes decreases as income increases c. The amount of tax paid is directly proportional to income d. The tax rate is constant The tax rate does not depend on income.17. 18, 19. 20. Consider the following information: GDP at factor cost = Rs.5,000 cr. Net factor income from abroad = Rs.600 cr. Indirect taxes = Rs. 1,355 cr. GNP at market prices = Rs.5,730 cr. The subsidies amount to a. Rs.950 er. b. Rs.1,030 cr. cc. Rs.1,126 er. d. Rs.1,290 cr. fe. Rs.1,500 cr. Which of the following is true, if Mr. Somesh transfers Rs.1000 from his current account ina bank to a fixed deposit scheme in the same bank? a. M1 falls, but M2 rises Both M1 and M2 rises M1 falls, but M3 rises M2 falls, but M3 remains constant eaog Both M2 and M3 remain constant. If the price increases due to increase in labor cost per unit of output, then it is termed as a. Demand pullinflation ‘Wage-push inflation Profit-push inflation ‘Supply-shock inflation Disinflation. Savings function of an economy is S 300 + 0.25 Yd. Break-even disposable income for the economy is a 75MUC b. 300MUC c. 900 MUC d. 1,200 MUC. fe. 1,500 MUC. 24 22, 23. 24. ‘SLEC502 MEBE (A)/0513 The value of existing houses bought in a particular period is a. Included in GNP but not GDP b. Included in GDP but not GNP c. Included in both GDP and GNP d. Neither included in GDP nor GNP fe. Included in NFIA The difference between a country’s merchandise exports and its merchandise imports is the a. Balance of payments Balance of trade c. _ Balance of settlement 4. Capital account balance e. Budget deficit Which of the following is a transfer payment? a. The payment received by a teacher. b. The payment received by a nurse for taking care of a child A pension cheque received by former bank employee d, The payment received by a central government employee from the central government to meet his travelling expenses, @. Payment received from the neighbours for caring for their garden while they were on vacation Financial assets of the RBI does not include a. RBI's credit to government Credit to commercial banks RBI's credit to commercial sector Net foreign exchange assets with RBI Furniture and buildings of RBISLEC502 MEBE (A)/0513 25. 26. 27. The devaluation in the value of rupee is aimed at a. Increasing imports b. Increasing exports ©. Decreasing exports 4. Decreasing national income fe. Decreasing the rate of inflation. ‘The real rate of interest, a, Equals the nominal rate of interest plus the rate of infiation b. Equals the rate of inflation minus the nominal rate of interest ©. Equals the nominal rate of interest minus the rate of inflation d. Tends to increase when inflation increases @ Is more relevant to investors than consumers. Ifa scheduled bank meets its cash reserve requirement of 4% by depositing Rs. 9 crore with the RBI, then a. Total deposit liabilities of the bank are Rs.22.50 crore b. Total deposit liabilities of the bank are Rs.226.00 crore ©. Total deposit liabilities of the bank are Rs.250.00 crore d. Total deposit liabilities of the bank are Rs.180.00 crore ©. Total deposit liabilities of the bank are Rs.175.00 crore. 28. 29. 30, Increase in net RBI credit to the Central Government is reflected in a. Budget deficit Revenue deficit Monetized deficit Gross Primary deficit Gross fiscal deficit eaog Gross fiscal deficit implies. a. Excess of total_-—_-government expenditures over revenue receipts and grants, b. Total of expenditure ©. Difference between governments non- plan and plan expenditure 4. Difference between non-developmental expenditure and capital gains e. tis the same as revenue deficit governments non-plan If the country X enjoys a comparative advantage in the production of coffee over the country Y, then a. The opportunity cost of coffee in X is higher than in Y b. The opportunity cost of producing coffee in X is lower than in Y producing ©. Neither X nor Y should specialize in the production of coffee d. Both the countries enjoy absolute advantage in the production of coffee fe. The opportunity cost of producing coffee is same in Y and x END OF Part ASLEC502 MEBE (A)/0513 Part-B &C TOTAL MARKS: 70 MAXIMUM TIME: 2/ HOURS INSTRUCTIONS TO CANDIDATES ‘Answer Part B & Part C in SINGLE ANSWER BOOKLET. Write your enrollment number on the first page of the answer book at the space provided only. All rough work may be done on any blank page in the answer book. Pencil should not be used for answering ‘The unused portion of the answer book must be boldly crossed prior to submitting Attempt all questions Marks are indicated against each question Part B: 50 Marks: 120 Minutes Problems testing, Conceptual Understanding and Application, Analytical Ability, Caselets, Situational Analysis / Applications of concepts 4. The following information is extracted from National Income Accounts of a country: Items Rs (in crores) Undistributed corporate profits 1225 Personal taxes 150.0 Depreciation 875 Social security contributions 525 Corporate income taxes 140.0 Transfer Payments 77.0 Indirect Business taxes 70.0 Exports 84.0 Government purchase of goods and services 315.0 Gross private domestic investment 262.5 Imports 174 Personal Consumption Expenditure 875.0 You are required to compute a) National Income, b) Personal Income, ©) Disposable personal income and 4) Personal saving (3+3#2+2=10 marks)SLEC502 MEBE (A)/0513 2. The following information is available from the balance sheet of the Reserve Bank of The following balances are taken from balance sheet of the RBI Particulars Rs. cr. Credit to Government 1780 Credit to Banks 410 Government Deposits 2 Other non-monetary liabilities "1 Net worth 510 Credit to commercial sector 112 Net foreign exchange assets 15 Other assets 78 Deposits of banks 90 The currency/deposit ratio has been ascertained as 0.30. Reserve ratio imposed by the central bank is 4%. The amount of Government money is negligible. Required: a) Compute the money supply in the economy. b) If Central bank wants to reduce the money supply by 18% by changing the reserve ratio, ‘what should be the new reserve ratio? ©) Explain the relationship between money supply and reserve ratio from your answer. (4#4#2=10 marks) 3. Saving function (S) = - 40 + 0.25Y* Transfer Payments (TR) Tax function (T) = 0.1Y Private investment function (|) = 500 ~ 151 Exogenous Gov. expenditure (G) = 745 Import function (M) = 10 + 0.1Y Exports (E) = 250 Transaction demand for money (Mt) = 0.25Y ‘Speculative demand for money (Ma) = 125 ~ 504i Money Supply (Ms) = 250 Questions: =25 a Derive the IS, LM equation. Calculate the value of equilibrium income and rate of interest. b c. —IFG increases by 100 units, what will be the impact on income and rate of interest? d. Find out the crowding out effect of private investment, e if the government wants to neutralize the crowding out of private investment by changing the money supply, then what will be the change in money supply? (243444244 15 marks)Consumption function Disposable income Tax function Import function ‘SLEC502 MEBE (A)/0513 c=8+85y% y T=0.1Y 20Y Investment Government Expenditure Transfer payments Exports Calculate: The value of Government budget at equilibrium. (marks) Following is the information relating to balance of payments of an economy for the year 2011-12 Items [mus External Assistance to the country Ey External Assistance by the country 82 | Transfers(Debit) 170 | Transfers( Credit) 248 Merchandize exports 34954 Merchandize imports 36984 Expor of services 31944 Import of services 24928 Investment Income (ered) 2108 investment income (debit) 858 Short term loan (credit) a4 | Short term loan(debit) 576 FDI to abroad 70 FDI from abroad 200 Question: Find the value of trade balance, current account, capital account, official reserve and overall BOP status of the economy. (10 marks)SLEC502 MEBE (A)/0513 Part C: 20 Marks: 30 Minutes Case Analysis 6. Suppose that a country has a current account surplus of Rs 20 million and a capital account deficit of Rs 8 million Questions: a. Isthe BOP in deficit or surplus? b. Ifthe Central Bank intervenes, does it buy or sell home currency and why? ©. Ifthe Central Bank does not intervene, what will be the impact on the exchange rate of home currency? (8 marks) 7. It has now become clear that Indian economic growth has slowed down considerably in the current year after recording a robust rate of nearly 9% average over the past five years. While the global financial crisis, the most severe since the 1930s, has done much of the damage, the growth momentum was also affected adversely in first haif of 2011-12 by the tight monetary policy of the RBI to contain inflation. The policy response of the government has so far been limited to easing liquidity by reducing CRR and repo rates and a fiscal stimulus of the order of ‘$60 billion. Sceptics would be concerned about the effects of such a package on fiscal balance and hence on inflation, keeping in mind the already stretched fiscal deficit in the current year after including off-budget expenditure. To sum up, the time has come for taking bold steps to revive the growth momentum of the economy in the wake of the worst crisis of the world economy. Ques ns: a. Explain how growth momentum got adversely affected by the tight monetary policy of RBI. b. With reference to the above case, explain how liquidity has been eased out by reducing CRR and Repo Rate. What do you understand by Fiscal Deficit? What might happen if fiscal deficit is on the higher side? (4x3= 12 marks) END OF THE QUESTION PAPER 10