B.A. (Hons) Economics-II Year
Paper – V
MACRO QUESTION BANK
INDRAPRASTHA COLLEGE FOR WOMEN
HALF YEARLY EXAMINATION JANUARY 2010
1.
Attempt any three
(a)
Suppose the economy is operating at equilibrium at y 0  5000 . If
the govt. increases the tax rate t by 10% and govt. expenditure
by 500, will the budget surplus change? Why?
(b)
What is crowding out? Explain situations of full crowding out
and zero crowding out.
(c)
Suggest a policy mix for a closed economy to increase income
while keeping the real rate of interest constant.
(d)
Derive an upward sloping aggregate supply curve.
2.
(a)
(b)
(a)
(b)
3.
What is monetizing of Budget Deficit? With the help of IS-LM
curves, explain the case where increase in govt. spending need
not cause crowding out when the budget deficit is monetized?
What is the effect of fiscal expansion on the output, interest rate
and price level under Kenesian and classical supply
coordination’s?
Or
Derive an aggregate demand schedule. Show the effects of an
increase in the nominal stock of money on AD schedule.
Discuss the demand side and supply side effects of a cut in tax
on aggregate demand in the classical equilibrium model.
(a)
The commitment to maintain a fixed exchange rate makes
money endogenous in a situation of perfect capital mobility and
fixed prices. Discuss.
(b)
Describe the adjustment mechanism to a balance of payments
disequilibrium under classical assumptions.
Or
(a)
(b)
4.
What are the short run and long run price and volume effects of
an exchange rate depreciation? How does it affect the trade
balance in the short run and long run?
Explain that under perfect capital mobility. Expectations of
exchange rate fluctuations are self fulfilling.
Using the AD-AS diagram, show what happens to output, price level
and unemployment rate in the short run and in the medium run when
there is an increase in the price of oil. Assume that the economy
starts at the natural level of output.
Or
Bliss Point Studies
9891555578
1
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
Discuss the effects of nominal money growth on output,
unemployment and inflation rate in short run and in the medium run.
SATYAWATI COLLEGE (EVE)
MID TERM EXAMINATION 2009-10
Answer all questions.
1.
(a)
(b)
(c)
Explain why points off the IS curve are points of disequilibrium?
Derive the AD curve in the IS-LM framework.
Write a short note on purchasing Power Parity.
2.
(a)
Write a short note on the Fiscal Policy Multiplier in the IS-LM
framework.
(b)
Explain the concept of neutrality of money using the AD-AS
approach.
Or
3.
(a)
(b)
Write a short note on Debt-GDP Ratio.
Why do firms offer a wage higher than the minimum required to
hire workers?
(a)
Explain how economy moves from an under full employment
equilibrium to the full employment equilibrium without any
government intervention. Use the AD-AS approach to answer
your question.
(b)
Compare the adaptive theory of expectations with the rational
expectation theory.
Or
4.
(a)
Explain the ‘Mundell-Fleming Modal’ with the assumptions of
perfect capital mobility, fixed exchange rates and fixed prices.
(b)
Write a short note on ‘gains from investment in R&D’.
(a)
Critically examine the ‘Life Cycle Hypothesis’ of consumption.
(b)
Write a short note on Tobin’s q.
Or
(a)
(b)
(a)
(b)
Critically examine the ‘Life cycle Hypothesis’ of consumption.
Write a short note on Tabin’s q.
Or
Does a tax cut increase consumption or is it neutral in its effect
on consumption?
Write a short note on the Accelerator Model of inventories’.
Bliss Point Studies
9891555578
2
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
Questions
1.
(a)
Derive IS & LM equations and compute equilibrium level of
income and rate of interest for the economy with the following
specifications:
Consumption Function C = 200 + .75Yd
Investment function I = 200 – 25 μ
Government purchases G = 200
Taxes T = 200
Real demand for money function md  5y  100μ
Nominal money supply MS = 900
Price level P = 2
[yd – disposable income y – income, r – percent interest rate. All
other figures are in Rs. – Crores]
2.
(b)
What will be effect of increase in government purchases on
budget surplus.
(c)
How does an investment tax credit stimulate investment?
Explain with the help of diagrams.
(a)
Define an adverse supply stock. How can it be accommodated,
explain using the diagram.
(b)
Explain Robert Lucas rational expectations approach. Show the
effect of expected and unexpected increase in money supply.
Or
3.
(a)
Derive the expectation argument Philips curve equation from
the aggregate supply function.
(b)
Show that trade off between unemployment and inflation is
possible only if the short run and not in the long run.
(a)
Within the dynamic aggregate demand and supply framework,
show the short run and the long run effects on output and
inflation of an increase in the growth rate of money supply
starting from the steady state.
(b)
What is the relationship between money growth, inflation and
the nominal interest rate in the long run
Or
4.
(a)
Write down the equations for dynamic aggregate demand curve
and the dynamic aggregate supply curve. Show how a one time
monetary expansion disturbs the initial equilibrium.
(b)
Explain and show clearly the effects of an increase in the growth
rate of money on interest rates and inflation.
(a)
Explain how fiscal policy works in influencing output and
interest rates in a country with perfect capital mobility fixed
prices and fixed exchange rates.
Bliss Point Studies
9891555578
3
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
(b)
5.
Paper – V
“Under fixed exchange rates and perfect capital mobility, a
country cannot pursue an independent monetary policy”.
Assuming Capital to be perfectly mobile, the price level to be fixed,
exchange role to be flexible, illustrate and explain the effects of :
(i)
Fiscal expansion
(ii)
Monetary expansion
HOME EXAMINATION 2009-2010
1.
2.
(a)
Briefly Explain the theory of rational expectation. Also explain
its shortcomings. Do you think that it is an improvement over
the theory of adoptive expectation?
(b)
Explain the concept of crowding out. Use diagram.
(c)
In a closed economy with As & AD analysis explain the Short
Run & Long Run Effects of expansionary monetary policy on
Output & Employment Level.
(a)
Derive IS-LM Curve & Show how interest rate is determined. In
a closed economy with IS-LM Framework explain the Points off
the eq m equilibrium Point. Suppose the economy is in the region
with excess demand for goods & excess demand for money.
What are the adjustments required in both the commodity
Market & Money Market to bring the economy back to the
equilibrium Point?
Or
Show that in the IS-LM Model for a Closed Economy a given change in
money Supply has a larger effect on Output the less income Sensitive
the demand for money. How does the response of the equilibrium
interest rate to a change in Money Supply depend on the sensitivity of
Money Demand? Explain.
3.
(b)
Critically Explain the Quantity Theory of Money?
(a)
Using the AD & AS framework show the Short Run, Medium
Run & Long Run effects of a Monetary expansion. Is money
neutral in the Long Run?
(b)
According to Solow, Technological Progress is the source of
sustained per Capita growth. Explain.
Or
In the Solow Model, how does the Saving Rate & Population growth
rate affect the steady state level of Income? Why Policymaker Choose
the Golden Rule Level of Capital?
Bliss Point Studies
9891555578
4
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
4.
Paper – V
(a)
Given Consumption, C = 40 + 0.75 Yd
Investment, I = 140-10 i
Govt. Spending, G = 100
Money Demand, Md = 0.2Y – 5i
Money Supply, Ms = 85
Tax, t = 80
Compute:
(i) The equilibrium Income & Interest Rate.
(ii) &Derive IS & LM equation.
(iii) What is the value of the Budget Surplus?
(b)
How does the Philip’s Curve link Inflation to unemployment?
Or
(a)
How does endogenous growth theory explain Persistent growth
without the assumption of erogenous technological progress?
How does this differ from the Solow Model?
(b)
If the AS Curve is vertical. Can accommodative Monetary Policy
affect Output? Why money is neutral in the classical Supply
case using IS-LM Curves.
HOME EXAMINATION 2006-07
1.
Consider an economy with the following features:
Consumption, Rs.
C  126  0.8Yd   5R
Where Y(d) = disposable income, Rs.
Investment, Rs.
I = 200 – 15R
Where R = rate of interest, percentage.
Tax, Rs.
T = 20
Government expenditure, Rs.
R = 60
Exports, Rs.
X = 60
Imports, Rs.
M = 30 + 0.05Y
Where Y = income, Rs.
Real money demanded for transaction and
Precautionary purposes, Rs.
m(1) = 0.4Y
Real money demanded for speculative
Purposes, Rs.
m(2) = 300 – 40R
Supply of money, Rs.
m(s) = 880
Price index, a number,
p=2
Full employment income, Rs.
Y(F) = 1100
(a)
Calculate the equilibrium levels of income and rate of interest.
(b)
If the government reduces its expenditure by Rs. 20, what shall
be the addition to the nominal supply of money, to prevent the
income from failing?, and
(c)
What shall be the change in tax to create full employment.
Bliss Point Studies
9891555578
5
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
2.
Paper – V
Within the framework of aggregate demand and supply curves, explain
the short-run and long-run effects of a fall in labour productivity on
output and prices. How does an expansionary fiscal policy affect the
long-run equilibrium?
Or
Sketch the graphs of dynamic aggregate demand and supply curves,
and show the equilibrium in algebraic terms. Where will the
equilibrium move if there is a reduction in the growth rate of money
supply?
3.
How do monetary and fiscal policies work in an economy where capital
is mobile and price level fixed but exchange rate flexible?
Or
How does the flexibility of wages and price help an economy with
varying prices and a fixed exchange rate, to realize a simultaneous
equilibrium in both the internal and external balances?
4.
Write on any two of the following:
(a)
Interest-elasticity of an IS or LM line and the crowding out.
(b)
Long-run Phillips curve.
(c)
Devaluation and J-curve.
(d)
Sterilized and non-sterilized intervention by the Government.
(e)
Derivation of a demand curve by means of IS-LM lines.
B.A. (HONS)II-NS
1.
2.
(a)
Consumption
Tax
Investment
Government
Spending
Real demand for money
Real money supply
Exports
Imports
C = 50 + .8(Y – T)
T = 100
I = 150 – 5i
G = 100
L = .2Y – 10i
M/P  100
X = 20
M = 10 + .1Y
(i)
Write down the IS and LM equations
(ii)
Compute the equilibrium values of interest rate and income.
(iii)
Calculate the trade balance. Is thee a trade deficit or a surplus?
(a)
What is budget surplus? What will be the effect of increase in
government purchases on the budget surplus?
Bliss Point Studies
9891555578
6
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
3.
(b)
What is crowding out? Explain using diagram as to how does an
increase in government spending lead to full crowding out when
LM curve is vertical.
(c)
How des an investment subsidy affect the rate of interest,
income and investment. Explain with the help of diagram.
(a)
How does an investment subsidy affect the rate of interest,
income and investment. Explain with the help of diagram.
(b)
Define an adverse supply shock. How does it affect price level
and output. How can such a shock be accommodated?
Or
Derive aggregate supply curve from the Phillips curve.
(a)
4.
Paper – V
(b)
Define wage – stickin ess. Explain any three of the following
models of wage stickiness.
(i)
Imperfect information
(ii)
Coordination problems.
(iii) Contracts and long term relationships.
(iv)
Insider-outsider models.
(a)
Use the IS-LM closed economy model to analyze the impact of
an increase in money supply on the equilibrium level of income
and rate of interest.
(b)
Using the AD and AS framework show the short run, medium
run, and long run effects of a monetary expansion. Is money
neutral in the long run?
BA (HONS) – IIND YEAR
1.
Consider an economy with the following specifications:
C  200  0.8Yd  500r
Consumption function
Investment Function
I  200  500r
Government purchases
196
Taxes
T  20  0.25Y
Md
 0.5Y  1000r
Real Money Demand
P
Ms
 500
Real Money Supply
P
(Here Yd is disposable income, Y is national income, r is real rate of
interest in percentage terms and other figures are in repees crores)
Answer the following questions:
(a)
Derive the IS and LM curve equations. Compute the equilibrium
values of Income and rate of interest.
Bliss Point Studies
9891555578
7
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
2.
Paper – V
(b)
Calculate the fiscal policy multiplier and the simple Keynesian
multiplier. Explain why the value of the former is lower than the
latter.
(c)
What is the effect of Rs. 300 increase in government wants to
realize the full multiplier effect, what would the accommodating
increase in money supply be?
(a)
What is crowding out? Explain the situations of zero and full
crowding out.
(b)
Use the IS-LM closed economy model to analyse the impact of
an increase in nominal money supply on the equilibrium level of
output, prices and interest rates
Or
3.
(a)
Explain the effect of increase in government expenditure on
output and prices in the Classical and Keynesian models.
(b)
Explain how the aggregate supply curve is related to the Phillips
curve under conditions of sticky wages.
Write down the equations for the dynamic aggregate demand curve
and the dynamic aggregate supply curve. Show how a one time
monetary expansion disturbs the initial equilibrium. Explain the
short-run and long-run effects with the help of a phase diagram.
Or
4.
(a)
Explain the relationship between money growth, inflation and
the nominal interest rate in the long run. Explain the
adjustment path of the nominal interest rate and the rate of
inflation as the result of a sustained increase in the growth rate
of money supply.
(b)
Explain briefly the propositions
approach to the labour market.
(a)
Traders in the asset market suddenly learn that the interest
rate on dollars will decline in the near future. Explain the effect
of this on current dollar/euro exchange rate, assuming that the
current interest rates on rates on dollar and euro deposits do
not change.
(b)
Assume that capital is perfectly mobile, the price level is fixed,
and the exchange rate is flexible. Now let the government
increase purchases. Explain what happens to levels of output,
interest rates and current account.
of
rational
expectations
Or
(a)
Imagine that everyone in the world pays a tax of t% on any
interest earnings and on any capital gains due to exchange rate
changes. How would such a tax alter the analysis of interest
Bliss Point Studies
9891555578
8
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
parity condition? How does the answer change if the tax applies
to interest earning but not to capital gains, which are untaxed?
(b)
In an economy where capital is perfectly mobile, the price level
is fixed, and the exchange rate is fixed, why is money stock
endogenous and what is the impact of an expansionary fiscal
policy?
SHYAM LAL COLLEGE (EVENING) : HOUSE EXAMINATION 2006-07
1.
2.
3
Consumption function is given by C = 40 + 0.75Yd, tax T = 80,
investment I = 140 – 10i, government expenditure G = 100, money
demand Md = 0.2Y – 5i, nominal money supply Ms = 170, price level
P = 2. (Except I and P, figures are in Rs. Crores)
(a)
Compute the equilibrium level of income, Y, and rate of interest,
i.
(b)
Suppose the government decides to provide new cars to all its
employees, costing a total of Rs. 65 crores. What will be the
impact on equilibrium income?
(c)
If the government wants a full multiplier effect to materialize,
how much increase in money supply should accompany the
above increase in government expenditure? Explain.
(d)
A leading national daily reported: “The fiscal deficit (a measure
of budget deficit) has increased to an alarmingly high level at
6% of GDP. Therefore, the government must immediately
address the problem, by reducing its expenditure.” Critically
examine the above statement using the multiplier.
Attempt any two of the following:
(a)
What is an IS curve? Explain the factors which affect its slope.
How does a decrease in government expenditure affect the IS
curve?
(b)
What is crowding out? Explain with the help of diagrams, the
situations of full crowding out and zero crowding out.
(c)
Explain the difference in mechanism by which a tax-cut
increases output in a classical system and a ‘Keynesian’ (IS-LM)
system.
(a)
Derive the expectations augmented Philips curve equation from
the aggregate supply curve equation. Show that the trade-off
between unemployment and inflation is possible only
in
the
short-run, not in the long-run. How does this result change if
we assume “rational expectations”?
Or
Write down the equations for the dynamic aggregate demand curve
and the dynamic aggregate supply curve. Show how a onetime
monetary expansion disturbs the initial equilibrium. Using a phase
diagram show both the long-run value in the short-run effects.
Bliss Point Studies
9891555578
9
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
Explain why the inflation might overshoot its long-run value in the
short-run.
(b)
“Consumption and investment are complementary
deflation, but competitive at full employment.” Discuss.
during
Or
“Saving is equal to investment at equilibrium” and “saving is always
equal to investment”: distinguish between these two statements.
4.
Write short notes on any two of the following:
(a)
Policy ineffectiveness proposition.
(b)
Adaptive Expectation Hypothesis
(c)
Neutral money and long-term neutrality of money
(d)
Stagflation.
LAKSHMIBAI COLLEGE HALF YEARLY 2006-07
1.
(a)
(b)
2.
(a)
(b)
(a)
(b)
An economy is described by the following functions:
Consumption
C = .8(Y – T)
Investment
I = 120 – 10i
Govt. Purchases
G = 100
Income Tax
T = .3Y
Exports
X = 165
Imports
M = 55 + .06Y
Real demand for money
L = .25Y – 5i
Real money supply
M/P = 100
(Here: Y stands for national income, I rate of interest in
percentage terms. All other figures are in Rs. Crores)
Answer the following questions:
(i)
Write down the equations for the IS and LM curves.
Calculate the equilibrium levels of income and the rate of
interest.
(ii)
If govt. purchases increase by 100, what should be the
corresponding increase in the real money supply to keep
the rate of interest constant.
(iii) If an autonomous tax of 10 is introduced, what would be
the magnitude of the shift in the IS curve?
Show the effects of an increase in govt. expenditure on income
and the budget surplus in a proportional income tax model.
Examine the supply – side effects of a lump – sum tax cut in the
classical model?
Compare the effects of a fiscal expansion with a monetary
expansion in order to move the output from below full
employment to its full employment level. What is a policy – mix?
OR
Show the classical supply case.
Discuss the circumstances under which the monetary and fiscal
policy multipliers are each, in turn, equal to zero.
Bliss Point Studies
9891555578
10
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
3.
(a)
(b)
(a)
4.
(b)
Do
(a)
(b)
(c)
Paper – V
Why are wages and prices sticky in the short run?
Write a note on the Adaptive Expectations Hypothesis.
OR
Under what circumstances might it be possible to reduce
inflation without causing a recession?
Write a note on the Lucas supply curve.
any two of the following:
Explain the Permanent Income Hypothesis of consumption. If
this hypothesis is combined with the assumption of rational
expectations, what are the implications for consumption?
What is meant by a firm’s desired capital stock? Why does a
firm adjust gradually towards it?
Show that the transactions demand for money is a function of
income and the rate of interest.
HOME EXAMINATION 2007-08, SRCC
1.
2.
Consider an economy with the following features:
Consumption, Rs.
C = 126 + 0.8Y(d)-5R
[Where Y(d) = disposable income, Rs., and R = rate of interest,
percentage.]
Investment, Rs.
I = 200 - 15R
Tax. Rs.
T - 20
Government expenditure, Rs.
G = 60
Exports, Rs.
X = 40
Imports, Rs.
M = 30 + 0.05 Y
[Where Y - income, Rs.]
Real money demanded for transaction and
precatioanry purposes, Rs.
m(I) = 0.4Y
Nominal money demanded for speculative
purposes, Rs.
M(2) = 600-80 R
Supply of money, Rs.
m{s) = 880
Price index, a number.
p=2
Full employment income, Rs.
Y(f) = 1100
(a)
Calculate the equilibrium values of income and
interest,
rate of
(b)
If the Government reduces its expenditure by Rs. 20, what shall
be the addition to the nominal supply of money to prevent the
income from falling? And
(c)
What shall be the change in tax to create full employment?
Write down the equations for the dynamic aggregate demand and
supply curves. Show how a one-time monetary expansion disturbs the
initial equilibrium. Using a phase diagram, show both the long and
short run effects.
Bliss Point Studies
9891555578
11
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
OR
Use the aggregate demand and supply framework to show the effect of
an increase in oil prices on output and prices in the short-run and
long-run. Explain how either a fiscal expansion or an increase in the
supply of money can influence the long-run equilibrium.
3.
Draw the net exports schedule in the price-output plane. How can
devaluation in this situation deal with both internal and external
balances, assuming that the Central Bank does not follow any policy
to sterilize the effects of devaluation?
OR
Does a nominal devaluation always succeed in achieving a real
devaluation? What are the related empirical issues?
4.
Write on any two of the following:
(a)
Income version of quantity theory of money,
(b)
Wage-price flexibility and labour market,
(c)
Limitations of purchasing power parity, and
(d)
Harrod-Domar growth model
BA(Hons.) II
1.
2.
(a)
What do you mean by rational expectations? How are they
different from adaptive expectations?
(b)
Assume that the expected rate of inflation is equal to the actual
rate of inflation in the previous period. Starting from a position
of long run equilibrium, if government expenditure is increased
permanently at time T, describe the time path of adjustment of
GNP, inflation rate, real rate of interest, nominal rate of interest
and stock of real balances. What are the long run equilibrium
values of these variables?
Consider the following macroeconomic model for a closed economy.
(Y and r are real GNP and rate of interest respectively.)
Net taxes = Ta = 0.3Y – 250
Disposable income = Yp = Y – Ta
Private consumption expenditure = C = 200 + 0.8Yp
Government expenditure = G = 400
Desired private investment expenditure I =- 400 – 12 r
Supply of nominal balances = 80,000
Demand for real balances = L = 0.5Y – 10 r
(a)
Find the equation of the aggregate demand curve. (denote the
price level by P).
Bliss Point Studies
9891555578
12
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
3.
4.
Paper – V
(b)
Assume that the aggregate supply curve is horizontal, with a
vertical intercept of 100. Find the equilibrium values of GNP,
rate of interest and price level. What are the corresponding
levels of private investment expenditure, private consumption
expenditure and government budget surplus?
(c)
Continue with the same aggregate supply curve. If the supply of
nominal balances falls to 60000, what happens to the
equilibrium GNP, price level, and rate of crest? What are the
new levels of consumption, investment, and budget surplus?
(a)
Assuming prices to be constant, do you agree with the assertion
that fiscal policy is more effective the flatter the LM curve? What
is the economic rationale for your answer? How does the
effectiveness of fiscal policy depend on the slope of the IS curve?
(b)
Discuss some of the reasons due to which nominal wages don't
adjust instantaneously to clear the labour market.
(a)
In a macroeconomic model where supply behaviour is described
by Lucas aggregate supply curve show that an anticipated
expansion of money supply is neutral, even in the short run if
agents form expectations rationally.
(b)
What is efficiency wage? Is it necessarily equal (o market
clearing wage?
(c)
Do you agree with the assertion that an increase in demand for
money is usually inflationary?
HALF- YEARLY EXAM 2007-08 LSR COLLEGE (DELHI UNIVERSITY)
1.
(a)
C = 30 + 0.75 Y d
I = 20 + 0.05Y
G = 50
Taxes = 40
(i) Compute the equilibrium income, Y.
(ii) Find the multiplier value.
(iii) Does this fiscal policy structure work as an automatic
stabilizer? Explain.
(b)
In an economy some new restaurants open, and 1000 erstwhile
‘happy-to-be housewives’ start working there. What happens to
the (measured) employment, unemployment, labour force, and
unemployment rate? Explain briefly.
(c)
I, at the age of 25 years, and a (nearing retirement) 65-year old
colleague of mine receive an unanticipated inheritance of Rs. 50
lakh each. While I plan to spend henceforth Rs. 1 lakh p.a.
extra, my colleague has announced a Rs. 5 lakh rise in her
annual consumption. Is she over-reacting? Explain you answer
Bliss Point Studies
9891555578
13
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
in the light of Lifecycle, Hypothesis of Consumption. (Assume
common life expectancy of 75 years.)
2.
An economy having wage-price flexibility has an in-built mechanism
to withstand the fluctuations in aggregate demand, leaving the
aggregate output constant; the composition of aggregate demand
might change though. Explain the statement.
OR
3.
(a)
In the IS-LM framework explain the phenomenon of ‘crowding
out’ of aggregate demand. Examine briefly the role of different
parameters in determining the extent (i.e. the proportion) of
crowding out.
(b)
Define the AD Curve. Explain its derivation and slope.
(a)
Discuss the uncovered interest parity. Applying this condition,
explain diagrammatically the effect on exchange rate, e, if there
is
(i) an increase in the domestic interest rate
(ii)an increase in the foreign interest rate.
(b)
Given a situation of expected rising income profile and zero
income during retirement years, how does the APC out of labour
income vary with the age during working years? Does this basic
result change due to liquidity constraint? Explain.
OR
(a)
(b)
4.
In a model of perfect capital mobility, constant price level and
fixed exchange rate, examine how the monetary policy is
rendered powerless.
Distinguish between:
-
Sterilized and un-sterilized intervention in the foreign
exchange market
-
Spot and forward exchange rates
Write short notes on any two:
(i)
The Barro-Ricardo Hypothesis relating to tax-cut
(ii)
Devaluation and the J-curve phenomenon
(iii)
Self-fulfilling expectations and the consequences for the real
economy
(iv)
The legacy of outstanding government debt and the concept of
primary deficit
Bliss Point Studies
9891555578
14
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
LADY SHRI RAM COLLEGE MID TERM EXAMINATION 2007-O8
1.
Compulsory question. Attempt any three parts. All parts carry equal
marks.
(a)
Differentiate between fixed and sunk costs.
(b)
Explain how the curvature of an isoquant relates to Marginal
rate of technical substitution.
(c)
What are consoles of perpetuities? Suppose we consider a
consol that promises to pay $x forever. How will you compute
the value of this consol?
(d)
How would you explain an increase in the consumption of a
product with an increase in its price?
(e)
Find out pure strategy Nash equilibrium for the following
Prisoner’s Dilemma game:
Player B
Confess
Not Confess
Player A Confess
(–2, –2)
(0, –5)
Not Confess
(–5, 0)
(–0.5, –0.5)
2.
3.
4.
(a)
Distinguish between pure and mixed strategies. Solve the
following game for all possible (pure/mixed strategy) Nash
equilibrium(s).
Player B
Movie
Concert
Player A Movie
(4, 2)
(0, 0)
Concert
(0, 0)
(2, 4)
(b)
If income and leisure are perfect substitutes what shape do
indifference curves take? Under what conditions will this lead to
(i) No work at all
(ii) Work at all possible hours.
(a)
Differentiate between Slutsky and Hicks Substitution effect for
Quasi-Linear preferences.
(b)
A firm producing a single product can produce the entire output
in either one plant or in two identical plants. Which alternative
will the firm choose if:
(i) there are increasing returns to scale in production.
(ii) there are decreasing returns to scale in production.
(a)
Solve for equilibrium consumption bundle of a consumer, given
utility function
U  min 3x1 , 2x 2  and budget line 2x1  4x 2  60 .
Also find out change in demand due to Slutsky Substitution and
income effect if price of first commodity decreases to Re. 1.
Bliss Point Studies
9891555578
15
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
5.
6.
Paper – V
(b)
Budget set for a consumer was OACB. After a policy change it is
OACD. What kind of policy instrument could have led to this
change? Find out the numerical magnitude of this policy
instrument.
(a)
“The Weak Axiom of Revealed Preference (WARP) and the Strong
Axiom of Revealed Preference (SARP) are necessary conditions
that consumer choice have to obey for optimizing choice”.
Discuss.
(b)
Write the budget constraints for the consumer in terms of
present value and future value. What would be their geometric
interpretation?
(a)
Explain the concept of Maximin strategy in game theory with an
example.
(b)
If the income consumption curve for commodity X is a vertical
straight line, can the demand curve for X be downward sloping?
Explain.
(c)
Explain why for an individual with convex preferences, averages
are preferred to extremes.
KALINDI COLLEGE HALF YEARLY EXAMINATION JANUARY 2007-08
1.
(a)
Show that in a classical economy model the level of output will
be at the full employment level at all price levels.
(b)
What will be the impact of an increase in government spending
on output in the classical model?
Or
The classical aggregate supply curve is vertical. Why? Will it be still
vertical it wages were sticky downwards?
2.
In an economy:
Consumption
Investment
Government Spending
Demand for Real Balance
Nominal Money Supply
Price Level
Income
(C) = 5 + 0.8yd
(I) = 208 – 4i
(G) = 167
(Md) = 0.4y – 4i
(Ms) = 900
(P) = 3
(Y) = 1000
(a)
Find equilibrium level of income(y) and rate of interest(i)
(b)
What would be the increase in government spending to achieve
full employment level of income?
(c)
What determines the slope and shift in the LM curve?
Or
Bliss Point Studies
9891555578
16
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
In an economy:
Consumption
Investment
Tax
Government Spending
Demand for Real Balances
Supply of Money
3.
(C) = 0.8(1 – t)y
(I) = 900 – 50i
(T) = 0.25y
(G) = 800
(Md) = 0.25y – 62.5i
(Ms) = 500
(a)
Find equilibrium level of income (y) and rate of interest (i).
(b)
What is the value of multiplier.
(c)
What would be the multiplier if there were no taxes?
What is random walk? How is random walk model of consumption
related to life cycle hypothesis – permanent income hypothesis when
consumers have rational expectation?
Or
4.
(a)
What is monetization of budget deficit? With the help of IS - LM
curves explain the case where increase in government spending
need not cause crowding out and if the budged deficit is
monetized.
(b)
What is budget surplus? Explain why an increase in the
government purchases will reduce the budget surplus by less
than the increase in government purchases.
Explain how the commitment to maintain a fixed exchange rate makes
the money stock endogenous in a country with fixed prices and perfect
capital mobility.
Or
What is real exchange rate? Why is it considered to be more relevant
than nominal exchange rate? What happens to the IS curve if the real
exchange rate R changes.
S.G.G.S.C. HOUSE EXAMINATION 2007-08
1.
Consumption
Taxes
Government Expenditure
Investment
Money Supply
Real Money Demand
(i)
C  90  0.8Yd
T = 50
G = 50
I = 140 – 5i
Ms  200
M d  0.2Y
Write the IS & LM Equations. Compute the equilibrium values
of interest rate, investment & Income.
Bliss Point Studies
9891555578
17
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
2.
3.
Paper – V
(ii)
If G increases to 70 find the new equilibrium values of interest
rate, investment & income. Compute the monetary policy
multiplier.
(iii)
Is there crowding out?
(iv)
Find the fiscal and monetary policy multipliers.
Answer any three of the following:
(a)
What is crowding out? Illustrate with the help of diagrams, the
situations of full crowding out and zero crowding out.
(b)
Define “Neutral Money”. Show using IS and LM curves, why is
money neutral under the classical supply model>
(c)
Using the IS LM framework show the effect of removal of
investment subsidy on the level of output, interest rate and the
level of investment.
(d)
Analyze the implications of a 1 year decrease in taxes for the
path of debt and future taxes considering the cases of full
repayment in year 2, full repayment in year t and debt
stabilization in year t.
Show how the aggregate supply curve can be obtained from the
Phillips curve.
Or
Examine the implications of the sticky wage model for the short run
aggregate supply curve.
4.
Explain the monetary approach to the exchange rate.
Or
(a)
Suppose the dollar interest rate and the pound sterling interest
rate are the same at 5 percent per annum. What is the relation
between the current equilibrium $/£ exchange rate and its
expected future level? Suppose the expected future $/£, $1.52
per pound, remains constant as Britain’s interest rate rises to
10 percent per year. If the U.S. interest rate also remains
constant, what is the new equilibrium $/£ exchange rate?
(b)
Are the Law of One Price and the Purchasing Power Parity the
same?
HOME EXAMINATION 2007-08, SRCC
1.
Consider an economy with the following features:
Consumption, Rs.
C = 126 + 0.8Y(d) – 5R
[Where Y(d) = disposable income, Rs., and R = rate of interest,
percentage.]
Bliss Point Studies
9891555578
18
Ravinder N. Jha
9811343411
B.A. (Hons) Economics-II Year
Paper – V
Investment, Rs.
Tax, Rs.
Government expenditure, Rs.
Exports, Rs.
Imports, Rs.
[Where Y = income, Rs.]
Real money demanded for transaction and
precautionary purposes, Rs.
Nominal money demanded for speculative
Purposes, Rs.
Price index, a number
Full employment income, Rs.
2.
I = 200 – 15R
T = 20
G = 60
X = 40
M = 30 + 0.05Y
m(I) = 0.4Y
m(s) = 880
p=2
Y(f) = 1100
(a)
Calculate the equilibrium values of income and rate of interest.
(b)
If the Government reduces its expenditure by Rs. 20, what shall
be the addition to the nominal supply of money to prevent the
income from falling?, and
(c)
What shall be the change in tax to create full employment?
Write down the equations for the dynamic aggregate demand and
supply curves. Show how a one-time monetary expansion disturbs the
initial equilibrium. Using a phase diagram, show both the long and
short run effects.
OR
Use the aggregate demand and supply framework to show the effect of
an increase in oil prices on output and prices in the short-run and
long-run. Explain how either a fiscal expansion or an increase in the
supply of money can influence the long-run -equilibrium.
3.
Draw the net exports schedule in the price-output plane. How can
devaluation in this situation deal with both internal and external
balances, assuming that the Central Bank does not follow any policy
to sterilize the effects of devaluation?
OR
Does a nominal devaluation always succeed in achieving a real
devaluation? What are the related empirical issues?
4.
Write on any two of the following:
(a) Income version of quantity theory of money,
(b) Wage-price flexibility and labour market,
(c) Limitations of purchasing power parity, and
(d) Harrod-Domar growth model.
*****
Bliss Point Studies
9891555578
19
Ravinder N. Jha
9811343411