Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
1. Which of the following helps in understanding the problem of scarcity better, by showing < Answer>
what can be produced with given resources and technology?
(a) Isoquant curve (b) Production possibility frontier
(c) Giffen paradox (d) Isocost curve (e)
Business cycles.
(1 mark)
< Answer
2. Which of the following variables is a flow variable? >
(a) Capital stock (b) A firm’s assets
(c) Gross fixed investment (d) Price index (e) Public debt.
(1 mark)
3. Suppose the rate of inflation is 2% and the real interest rate is 5%. The nominal interest rate < Answer>
will be
(a) 2.5% (b) 3.0% (c) –3.0% (d) 7.0% (e)
–7.0%.
(1 mark)
< Answer
4. The circular flow diagram shows >
I. Households providing firms with factors of production.
II. Income for factors of production flowing from households to firms.
III. Firms owning factors of production.
< Answer
11. Consider the following information: >
Particulars Rs. Crores
Income from Employment 25,000
Income from self-employment 15,000
Gross trading profit of companies 45,000
Gross trading surplus of public companies 35,000
Rental Income 15,000
Net Factor income from abroad 35,000 The GNP at factor
cost as per the income method is
(a) Rs 40,000 crores (b) Rs 70,000 crores (c) Rs 1,35,000
crores
(d) Rs 1,60,000 crores (e) Rs 1,70,000 crores.
(1 mark)
12. The main cause of this new confidence is Australia’s recent success in rebuilding its economy. < Answer>
The country may no longer be quite the “working man’s paradise” it was in the late 19th
century, when for a long stretch it was the richest in the world per head of population. But it is
now comfortably ensconced among the 15 most affluent countries and income inequalities,
though widening, are still smaller than in most comparable places. Growth has hovered around
4% or more for the past seven years, productivity has improved beyond all expectations,
inflation is relatively quiescent, and unemployment is heading downwards.
The following macro economic relations are given for Australia.
Savings function (S) – 250 + 0.30Yd
Disposable income (Yd) Y–T
Tax function (T) 0.25Y
Investment (I) A$ 100 billion
Government expenditure (G) A$ 500 billion
Exports (E) A$ 40 billion
Import function (M) 0.3Y If the
equilibrium output of Australia is to be increased by A$ 100, investment should be increased
by
(a) A$ 60.0 billion (b) A$ 77.5 billion (c) A$ 70.0 billion
(d) A$ 95.0 billion (e) A$ 90.5 billion.
(2 marks)
< Answer
13. For a two-sector economy, the consumption function is >
C = 100 + 0.75Y
And the autonomous investment in the economy is 100 MUC.
If the current output is 800 MUC, what will be the involuntary inventory accumulation in the
economy?
(a) 0 (b) 100 MUC (c) 200 MUC (d) 50 MUC (e)
250 MUC.
(1 mark)
< Answer
14. Which of the following is/are considered as an investment? >
(a) Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5 years
(b) Barucha invests Rs.5,000 in equity shares of a company
(c) Charlie and Co. accumulates unsold inventory worth Rs.1,000
(d) Delta Corp. buys ten used vehicles to strengthen its transportation fleet
(e) Both (a) and (b) above.
(1 mark)
< Answer
15. Consumption function for an economy is estimated to be C = 1,000 + 0.80 Yd. >
Which of the following is true if Yd is zero?
(a) Consumption is zero (b) Savings are Rs.1,000
(c) Income must be greater than taxes (d) Dissavings are Rs.1,000
(e) Savings are zero.
(1 mark)
< Answer
16. The following figure shows 'Keynesian' equilibrium of income and expenditure. >
If Y3 is full employment production, which of the following situations is likely to occur?
(a) An inflationary gap (b) A recessionary gap
(c) No output gap (d) A full employment situation
(e) A deflationary situation.
(1 mark)
17. Japan has had a sluggish economy for the past decade for reasons almost totally opposite of < Answer>
the United States. It is understandable that two such different cultures would have differing
economic problems as well as solutions to those problems. The normal Japanese citizens'
savings far exceeds their annual income, practically an unheard of practice in the U.S. This
lack of spending for years has plagued an economy in desperate need of a boost, but with
consumer confidence still falling it is unlikely that the Japanese will relinquish their tight fist
hold over savings anytime soon. The following data pertains to national income aggregates of
Japan.
Consumption function (C) = 200 + 0.80Yd, where Yd is disposable income
Investment (I) = ¥ 500
Government spending (G) = ¥ 200
Taxes (T) = ¥ 100
The equilibrium level of savings is of Japan is
(a) ¥ 600 (b) ¥ 700 (c) ¥ 500 (d) ¥ 800 (e)
¥ 900.
(2 marks)
< Answer
18. The following data pertains to an economy: >
Consumption (C) = 100 + 0.8Yd
Autonomous investment ( ) = 140 MUC
I
G
Autonomous Government spending ( ) = 400 MUC
Transfer payments ( ) = 200 MUC
TR
(Rs. Crore)
Items Credit Debit
Merchandise 53,000 65,474
Services 24,986 18,780
Transfers 15,225 367
Income 2,826 7,708
Foreign Direct Investment 4,790 1,179
Portfolio Investment 7,535 6,591
External Assistance 2,773 5,233
Commercial Borrowings (MT & LT) 2,737 4,435
Commercial Borrowings (Short Term) 8,189 7,210
Commercial Banks 16,926 8,973
Others 536 246
Rupee Debt Service — 474
Other Capital 6,402 2,909
Errors & Omissions 634 —During the
year 2003-04, over all Balance of Payments position for India is
(a) Rs.18,280 crore (surplus) (b) Rs.16,980 crore (deficit)
(c) Rs.17,280 crore (deficit) (d) Rs.17,280 crore (surplus)
(e) Rs.16,980 crore (surplus).
(2 marks)
76. Current account deficit for an economy is 5,000 MUC. If foreign exchange reserves increase by < Answer
1,000 MUC for the same period, capital account balance is >
(a) 1,000 MUC (b) 4,000 MUC (c) 5,000 MUC (d) 6,000 MUC (e)
10,000 MUC.
(1 mark)
77. A strong balance of payment (BOP) position in recent years has resulted in a steady < Answer>
accumulation of foreign exchange reserves. This accretion to reserves is attributed not only to
capital inflows and current account surplus, but also to valuation gains arising from a steady
appreciation of the major currencies such as the euro and pound sterling against the US dollar.
Given the following data, compute the current account balance for India.
(Rs. Crore)
Tax Revenue (net to Centre) 1,84,169
Non-tax revenue 69,766
Recoveries of Loans 18,023
Other Receipts 13,200
Borrowings and other Liabilities 1,53,637
Non-plan Expenditure
On Revenue Account (of which Interest Payments is Rs.1,23,223 cr.) 2,89,384
On Capital Account 28,437
Plan Expenditure
On Revenue Account 76,843
On Capital Account 44,131The
estimated revenue deficit for the year 2004-05 is
(a) Rs.1,13,292 cr (b) Rs.1,12,392 cr (c) Rs.1,12,292 cr (d) Rs.1,19,292 cr (e)
Rs.1,19,922. cr.
(2 marks)
END OF SECTION B
Suggested Answers
Economics II (122) : October 2004
1. Answer : (b) < TOP >
Reason : The production possibility curve represents the various combinations of two goods that can be
produced given the resources and level of technological development. It is nothing but the locus of
various combinations of two goods and the production possibility frontier represents the maximum
combinations of two goods.
(a) Isoquant represents a locus of various combinations of two inputs to produce a particular level of output.
Hence it is a cost curve
(b) Beyond the production possibility frontier it is not possible to produce the goods as the resources are not
available. Hence PPF represents the problem of scarcity of resources.
(c) Giffen paradox is an exception to Law of demand and does not explain scarcity of resources.
(d) Isocost curves represent equal cost curves
(e) Business cycle refers to fluctuations economic activity which results in cyclical changes in output,
employment and prices.
2. Answer : (c) < TOP >
Reason : In the Circular flow model all the factors of production are owned by Housholds and all the
production activity is undertaken by firms in the Business sector. Households provide factor of
production to firms in return for factor payments. Business sector (firms) produce and sell goods
and services to the Households.
5. Answer : (e) < TOP >
Reason : Contribution to National income = Contribution to GNP at market prices – depreciation – indirect
taxes = 20,000 – 2,000 – 1,000 = 17,000.
6. Answer : (a) < TOP >
Reason : Since the value added within the domestic territory will belong to the domestic factor inputs, NDP
at factor cost must be equal to domestic factor income.
Hence answer is (a).
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net Domestic Product at market price.
(c) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National product at factor cost
(d) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National Product at market price
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Personal income.
7. Answer : (a) < TOP >
Reason : National income (NI) = Factor income received by domestic residents + Factor income received by
domestic residents from foreigners + corporate profit taxes + retained earnings = 500 + 20 + 15 + 25
= 560.
8. Answer : (a) < TOP >
Reason : In India, Whole Sale Price index (WPI) is widely used for determinime of inflation. Because the
Office of the Economic Advisor to the Government of India publishes wholesale price indices for
individual commodities, commodity groups and the overall WPI monthly. They are reported in a
number of other publications also.
(a) Is the answer because Whole Sale Price index (WPI) is widely used for determinime of
inflation in India.
(b) Is not the answer because GDP deflator is not used for determining inflation in India. GDP
deflator is used to reveal the cost of purchasing the items included in GNP during the period
relative to the cost of purchasing those items during a base year. And it is difficult to bet the
data for the two years for comparisons.
(c) Is not the answer because in practice it is difficult to include each and every item for
construction of Consumer Price Index. (CPI)
(d) Is not the answer because both Whole Sale Price index (WPI) and GDP deflator are not used in
measuring inflation.
(e) Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not used in
measuring inflation.
9. Answer : (b) < TOP >
Reason : GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 – 165) = 3393
Thus, NDP at market price = GDP at market price – depreciation = 3393 – 118 =
Rs.3275 crore.
10. Answer : (a) < TOP >
Reason : Total value added in the process = Market value of the final product = 120
Value added in the manufacturing stage = Total value of the good after manufacturing stage – Total
cost for procuring raw-material = 50 – 30 = 20.
11. Answer : (e) < TOP >
S = – 250 + 0.30Yd
∴ C = 250 + 0.70Yd
T = 0.25Yd
M = 0.3Y
∴ The value of multiplier = m
1
1−β(1− t) + µ
=
1
1 − 0.70 ( 1 − 0.25 ) + 0.3
=
1
1 − 0.70 ( 0.75) + 0.3
=
1
= 1.29
0.775
=
Y = mI
Or, 100 = 1.29I
100
=
1.29
Or, I = A$ 77.5.
13. Answer : (a) < TOP >
Reason : When output (income) = 800, aggregate demand = C + I = 100 + 0.75(800) + 100 = 800. When AD
= Y, there will be no involuntary inventory accumulation in the economy.
14. Answer : (c) < TOP >
Reason : Investment includes expenditure on the plant and machinery produced during the year, expenditure
incurred on construction activities (both residential and non-residential) during the year and change
in inventories.
(a) And (b) are not the answer as both are financial transactions, which do not form part of
investment.
(c) Is the answer as change inventories is considered to be an investment.
(d) Is not the answer as purchase of used vehicles amounts only to transfer of ownership and not
an investment
15. Answer : (d) < TOP >
Reason : If the point Y3 indicates full employment situation, the diagram shows recessionary gap, since
equilibrium income is less than the full employment income.
< TOP >
17. Answer : (a)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C+I+G
Or, Y = 0.80Y + 120 + 500 + 200
Or, 0.20Y = 820
Y = 4,100.
S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (4100– 100)
= – 200 + 800
= 600.
< TOP >
18. Answer : (b)
Reason : At equilibrium, Y = C + I + G
Y = 100 + 0.8(Y – 0.25Y + 200) + 140 + 400
Y = 100 + 0.8Y – 0.2Y + 160 + 140 + 400
Y = 800 + 0.6Y
0.4Y = 800
Y = 2000
Budget surplus = Tax receipts – Transfer payments – Government spending
= 0.25(2000) – 200 – 400 = 500 – 600 = (100).
19. Answer : (d) < TOP >
Reason : crowding-out refers to decrease in private investment because of increase in interest rate caused by
the increase government spending . crowding out = 40 × 5 = 200.
20. Answer : (b) < TOP >
1 1 1
= =
1 −MPC(1 − t) 1 −0.80(1 −0.25) 0.40
Reason : Multiplier = = 2.5
∆Y = 2.5 × 500 = 1250
∴ The answer is (d).
22. Answer : (c) < TOP >
Reason : At equilibrium, S = I
– 50 + 0.3Y = 150 – 5i
Or, – 50 + 0.3(500) = 150 – 5i
Or, – 50 + 150 = 150 – 5i
Or, 5i = 50
Or, i = 10%.
23. Answer : (e) < TOP >
Reason :
Goods market will be in equilibrium when Y = AD = C + I + G
Y = 500 + 0.75(Y – T) + 100 – 50i + 1000
= 1600 + 0.75(Y – 1000) – 50i
Y = 850 + 0.75Y – 50i
0.25Y = 850 – 50i ….. IS curve
Money market will be in equilibrium when:
Money supply (Ms) = Money demand (Md)
500 = 0.25Y + 125 – 50i
375 = 0.25Y – 50i
0.25Y = 375 + 50i ….. LM curve
Thus, at simultaneous equilibrium,
850 – 50i = 375 + 50i
475 = 100i
i = 4.75
When i = 4.75, 0.25Y = 375 + 50 (4.75) = 612.5
Or, Y = 612.5/0.25 = 2450.
i. Private saving = Y – T – C = 2450 – 1000 – [500 + 0.75(2450 – 1000)]
= 1450 – [500 + 1087.5] = (137.5)
ii. Public saving = T – G = 1000 – 1000 = 0
iii. Domestic saving = Private saving + Public saving = (137.5) + 0 =
Rs .(137.5) crore
27. Answer : (b) < TOP >
Reason :
If interest elasticity of demand for investment and consumption is zero, IS curve is
I LM A
S LM1 Y = 1 − b(1 − t )
i
Hence, equilibrium income depends on the position of IS curve only.
Y
28. Answer : (c) < TOP >
Reason : If the aggregate supply curve slopes up before reading potential real GDP the government must
increase its spending by more than the recessionary gap to reach potential GDP.
< TOP >
30. Answer : (a)
Reason : Advancement in technology increase the productivity of existing factor inputs and shifts the long
run aggregate supply curve towards right. All other factors lead to decrease in the supply.
31. Answer : (e) < TOP >
Reason : High – Powered money (H) = monetary liabilities or central bank + Government money.
Non monetary liabilities = 200 + 80 = 280
Financial assets = Loans given to Government + Credit to banks + Loans given to commercial
section + foreign exchange assets
= 1,200 + 800 + 20 + 1,500
= 3,520
Monetary liabilities = Financial assets + other assets – Non monetary liabilities
= 3,520 + 60 – 280
= 3,300
∴ M = 3,300 + 100 = Rs.3,400 crore.
32. Answer : (b) < TOP >
Reason : Money supply (Ms) = High-powered money (H) x {(1 + Cu)/(Cu + r)}
6000 = (2000 - 500) {(1 + 0.2)/(0.2 + r)
Or, r = 10%.
34. Answer : (c) < TOP >
Reason : Stated differently the real rate of interest is the difference between the interest rate on a loan (or
nominal rate of interest) and the inflation rate.
35. Answer : (b) < TOP >
Reason : When a cheque is drawn on the Central bank, the money in circulation with public increases that in
turn increases the monetary liabilities of the central bank. Since monetary liabilities of the central
bank and government money form part of high-powered money, it also increases by the same
amount for a given increase in monetary liabilities of the central bank. Hence the answer is (b).
36. Answer : (e) < TOP >
Reason : The term ‘narrow money’ is Currency with the public + Demand deposits of the Banking system +
other deposits with the RBI.
39. Answer : (c) < TOP >
Reason : In the short run, if the price level falls, the real wage rate will be higher than the equilibrium real
wage rate and employment will fall.
40. Answer : (a) < TOP >
Reason : The aggregate supply explains the production behavior of an economy. If the actual price achieved
is more than the expected price, firms will experience a higher than anticipated level of profits. This
will lead to increase in production. That’s why the short run aggregate supply curve slopes upward.
But in the long run, the difference between expected and actual price levels is negligible. In the long
run, the output of an economy doesn’t depend on the price level, but on factors such as labor import
costs, capital stock, technological progress, etc. So aggregate supply curve of an economy in long
run is vertical.
(a) Is the answer because aggregate supply curve is positively sloped in the short run and vertical
in the long run.
(b) Is not the answer because aggregate supply curve is not positively sloped in the short run as
well as in the long run.
(c) Is not the answer because aggregate supply curve is not positively sloped in the short run as
well as in the long run.
(d) Is not the answer because aggregate supply curve is not positively sloped in the short run and
negatively sloped in the long run.
(e) Is not the answer because in the long run, output of an economy doesn’t depend on the price level, but on
factors such as labor import costs, capital stock, technological progress, etc.
41. Answer : (c) < TOP >
Reason : Disguised unemployment arises marginal productivity of labor is zero.
42. Answer : (e) < TOP >
Reason : (a) Is not the answer because Keynes considered the existence of full employment as a special
case. The Keynesian underemployment equilibrium is reflecting real life situations.
(b) Is not the answer because aggregate demand or effective demand indicates the total quantity of goods and
services that people want to buy. According to Keynes, effective aggregate demand determines the level of
employment and output.
(c) Is not the answer because Keynes argues that State intervention is essential as full employment is not possible
in an economy.
(d) Is not the answer because Keynes argues that an economy facing recession, budget deficit is an important tool
to overcome recession.
(e) Is the answer because in the Keynesian model, monetary policy is not effective as compared to fiscal policy.
Rather it is the fiscal policy, which is very effective and powerful. Keynes argues that government should
maintain an active stance with a combination of tax and expenditure policies to maintain the desired levels of
output and employment through manipulation of effective demand.
43. Answer : (c) < TOP >
Reason : Monetarist and new classical economist theories developed as a response to the problem of
unemployment and inflation at the same time.
45. Answer : (e) < TOP >
Reason : Supply side economics advocates to reduce government controls, to promote competition, to restrict
the power of trade unions and to remove institutional barriers. Supply side economics doesn’t
recommend to increasing corporate tax rate.
(a) Is not the answer because supply side economics recommend reducing government controls to
improve market efficiency
(b) Is not the answer because supply side economics recommend promoting competition to
improve market efficiency
(c) Is not the answer because supply side economics recommend restricting the power of trade
unions to improve market efficiency
(d) Is not the answer because supply side economics recommend removing institutional barriers to
improve market efficiency
(e) Is the answer because supply side economics doesn’t recommend increasing corporate tax rate
to improve market efficiency.
46. Answer : (d) < TOP >
Reason : The periodic upswings and down swings in the level of economic activity which forms a regular
pattern with an expansion of activity followed by a contraction ,succeeded by further expansion are
referred to as business cycles. Certain features characterize each of the phases.
(a) Mere existence of unemployment cannot be taken, as an indicator of recession or depression,
as in a country like India, even though the economy is growing these is unemployment. Hence
not true.
(b) Price levels are only an indicator of purchasing power, which in turn is dependent on income
levels of the people also. Hence cannot be taken as primarily indicator of the different phases
of business cycles.
(c) By definition, a business cycle is a swing in total national output; income and employment
market by contraction or expansion in many sectors of the economy changes in real GNP
brings changes in prices, employment. Hence only the basis of changes in real GDP different
phases is classified. Hence real GDP is the correct option.
(d) Changes in inventory level do give an indication about the different phases, but the changes
inventory levels are as a result of changes in real GDP.
(e) Gross investment is dependent on future growth rate, which again based on estimation of real
GDP in future. Hence gross investment cannot be primarily indicator.
48. Answer : (d) < TOP >
Reason : Recession is, technically, defined as decline in output for two or more consecutive quarters.
49. Answer : (d) < TOP >
Reason : The slope of the IS curve depends on the (i) sensitivity of investment spending to interest rate and
(ii) multiplier. If the sensitivity of investment spending to interest rate is high, a small change in
interest rate leads to greater change in investment spending and hence aggregate demand. This is
shown by a flatter IS curve. Similarly, the higher the value of multiplier, the higher will be the
change in income for a given change in autonomous factor. Thus, the value of multiplier also affects
the slope of the IS curve. As tax rates, MPI and MPC are determinants of multiplier, any change in
these factors would affect the slope of the IS curve. Mere changes in interest rates do not affect the
slope of the IS curve.
50. Answer : (d) < TOP >
Reason : Phillips curve shows the relationship between the unemployment and inflation. In short-run there
exist inverse relationship between inflation rate and unemployment rate because actual rate of
inflation is not always the same as the expected rate. But in the long run, the actual rate of inflation
equals expected rate and hence the economy automatically reach its natural rate of unemployment.
As there is no trade off between inflation and unemployment in the long run, the long run Phillips
curve is vertical.
51. Answer : (d) < TOP >
Reason : Cost-push inflation refers to increase in price as a result of the causes originating from the supply
side. The left ward shift of the supply curve occurs as a result of increase in the wage level
unmatched by the increase in the labour productivity, increase in the profit margins by those who
can exercise the market power and supply shocks.
a. Decrease in wages leads to decrease in cost of production and hence prices will reduce if the
producer passes on to the consumer
b. When the productivity of labour increase it leads to lowering the cost of production per unit
and hence the prices will decrease
c. As the cost of raw material increases it leads to increase in cost of production which results in
increases in prices. Hence this option is correct
d. Right ward shift in the supply curve occurs when there is a decrease in prices and hence not
the correct option
e. Finding of new raw material would lead to lower cost of raw material as the supply of raw
material has increased and hence lowers the prices.
53. Answer : (d) < TOP >
Reason : A country may be able to correct its persistent balance of payments deficit by reducing the
international value of its currency
54. Answer : (d) < TOP >
Reason : Foreign exchange by MMTC represents a credit entry in India’s Balance of Payments Statement.
Options in a, b, c and e are debit entries in India’s Balance of Payments Statement.
55. Answer : (d) < TOP >
Reason : Rajesh, who remitted $1000 to his parents staying in India forms private transfers. Private transfers
are part of invisibles.
a. Capital account includes those transactions that include all international purchases or sales of
assets such as real estate or government securities. It also includes banking capital.
b. The data collection process that underlies the published balance of payments figures is far
from perfect. Because total debits must equal total credits in principle, statisticians insert a
residual to make them equal. This correcting entry is known as statistical discrepancy or errors
and omissions (statistical discrepancy).
c. Merchandize imports and exports record transactions relating to goods purchased and sold by
the domestic country. It does not include transfers.
d. Invisibles have been sub-divided into services, transfers and investment income. Hence (d)
is the answer
e. External assistance includes concessional loans given to government or public sector bodies
and hence is a capital account item.
56. Answer : (c) < TOP >
Reason : Change in foreign exchange reserves = Current account balance + Capital account balance
Current account balance = (116,320 + 230,010 + 4000 + 1000) - (140,240 + 125,234 + 2000) =
351330 – 67474 = 83856 i.e. current account surplus (Credit)
Thus, change in foreign exchange reserves = 83856 + 202,000 = Rs.285856 crore.
57. Answer : (d) < TOP >
Reason : Efforts should be made to substantially raise the tax – GDP ratio for resources mobilization in a
non-inflationary manner.
58. Answer : (c) < TOP >
Reason : The laffer curve explains the relationship between total tax revenue and tax rates.
59. Answer : (c) < TOP >
Reason : Every economy goes through cyclical fluctuations in output, employment and prices. This will have
an automatic impact on certain government expenditures and revenues. The changes in the
government spending and revenues that results automatically as the economy fluctuates are called
non-discretionary fiscal policy. Automatic stabilizers are features of the government budget that
automatically adjust net taxes to stabilize aggregate demand as the economy expands or contracts.
(a) Is not the answer because an automatic stabilizer is not a mechanism in the stock market
that automatically cause stock market gains to be cancelled out by losses.
(b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms,
which automatically bring the economy out of a recession.
(c) Is the answer because automatic stabilizer refers to Government revenues and expenditures
that change automatically in response to changes in economic activity. When the economy is
in a contraction phase, these stabilizers increase transfer payments and reduce tax collections
in order to stimulate aggregate demand. On the other hand, when the economy begins to
expand, the automatic stabilizers increase tax collections and reduce transfer payments in order
to restrain growth in the aggregate demand.
(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.
(e) Is not the answer because Policy instrument of the Government to stabilize the exchange rate
of home currency does not refer to the automatic stabilizers.
60. Answer : (d) < TOP >
Reason : Value-added tax (VAT) is a good example of which kind of tax sales tax.
61. Answer : (d) < TOP >
Reason : Outside lag ’is the duration involved for output and employment to respond to changes of the
implemented of policies. Taxes have the least outside lag.
(a) Is not the answer because cash reserve ratio has not the least outside lag
(b) Is not the answer because bank rate has not the least outside lag
(c) Is not the answer because repo rate has not the least outside lag
(d) Is the answer because tax has the least outside lag
(e) Is not the answer because open market operation has not the least outside lag.
62. Answer : (d) < TOP >
Reason : An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy shifts the
LM curve to the right. It will result in a higher level of output, but the level of interest rate is
dependent on the relative magnitude of fiscal and monetary policies
(a) Is not the answer, because an expansionary fiscal policy combined with a liberal monetary
policy does not result in a lower level of output and a lower interest rate.
(b) Is not the answer because an expansionary fiscal policy combined with a liberal monetary
policy does not result in a lower level of output and a higher interest rate.
(c) Is not the answer because an expansionary fiscal policy combined with a liberal monetary
policy results in a higher level of output but not a lower interest rate.
(d) Is not the answer because an expansionary fiscal policy combined with a liberal monetary
policy results in a higher level of output but we can’t say that it results in a higher interest rate.
(e) Is the answer because an expansionary fiscal policy combined with a liberal monetary policy
result in higher level of output, but the level of output, but the level of interest rate is
dependent on the relative magnitude of fiscal and monetary policies.
63. Answer : (a) < TOP >
Reason : It would be appropriate for the RBI to pursue a expansionary monetary policy during a period of
deflation. Through expansionary monetary policy RBI would like to increase the aggregate demand
in the economy thereby causing the prices to increase. Of all the options, only open market purchase
of government securities is an expansionary monetary policy. All other options are contractionary
monetary policies.
64. Answer : (b) < TOP >
Reason : Monetary policy mainly controls the economy by regulating the interest rates through changes in
money supply. If the private investment is more sensitive to interest rate, then monetary policy can
more effectively regulate the economy.
(a) A recessionary condition cannot make a monetary policy more effective.
(b) When private investment is more sensitive to interest rate monetary policy will be more effective as a small
change in the interest rate would lead to a greater change in the output.
(d) During liquidity trap, the effectiveness of monetary policy decreases because during such policy, changes in
interest rate cannot have any effect on investments.
(e) Effectiveness of the monetary policy is not determined by the phases of business cycle.
65. Answer : (c) < TOP >
Reason : Bank rate, cash reserve requirements, open market operations and statutory liquidity ratio are the
quantitative instruments of RBI’s monetary policy. Selective credit control is not a quantitative
instrument of RBI’s monetary policy. It is a qualitative instrument of monetary policy.
66. Answer : (d) < TOP >
Reason : Dutt committee is appointed by government of India, in July 1967, submitted a report on the
working of the licensing system during the past ten years.
70. Answer : (d) < TOP >
Reason : Money Supply = Net bank credit to Government + Bank credit to commercial sector + Net
foreign exchange assets of the banking sector – Net non-monetary liabilities of the banking sector +
Rs.6200billion = 2000+3000+2200-1200+ Government money
Government money = Rs.200billion
75. Answer : (e) < TOP >
Reason : Overall balance of payment = Total Credit of the Bop – Total debit of the Bop
= 1,46,559 – 1,29,579
= Rs.16,980 crore (surplus)
76. Answer : (d) < TOP >
Reason : Change in forex reserves = Current a/c balance + Capital a/c balance
∴ Capital a/c balance = ∆ Forex reserves + Current a/c deficit
= 1000 + 5000
= 6000.
77. Answer : (b) < TOP >
Reason : Current account balance = Credit (Current account )– debit (Current account)
= [Earnings on loans and investments from abroad + Private remittances from abroad (transfers) +
Exports of services + Merchandize exports] – [Earnings on loans and investments to abroad +
Private remittances to abroad (transfers) + Import of services + Merchandize imports] = [500 + 500
+ 2,000 + 15,00] – [2,500 + 500 + 4,000 + 12,000]
= 18,000 – 19,000 = –1,000 i.e. Rs.1,000 crore (Deficit)
78. Answer : (a) < TOP >