NATIONAL SCHOOL OF BUSINESS MANAGEMENT

BSc (Hons) International Management and Business (PU)

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BSc (Hons) Accounting and Finance (PU)

Year 01 Special Repeat Examination

29 November 2022
PUCMN1206 – Economics for Business II

Instructions to Candidates
1) Answer any five (5) questions.
2) Time allocated for the examination is five (05) hours (Including downloading
and uploading time) .
3) Download the paper, provide answers to the selected questions in a word
document.
4) Please upload the document with answers (Answer Script) to the submission link
before the submission link expires
5) Answer script should be uploaded in PDF Format
6) Under any circumstances E-mail submissions would not be taken into
consideration for marking. Incomplete attempt would be counted as a MISSED
ATTEMPT.
7) The Naming convention of the answer script – Module Code_Subject
name_Index No
9) You must adhere to the online examination guidelines when submitting the
answer script to N-Learn.
10) Your answers will be subjected to Turnitin similarity check, hence, direct
copying and pasting from internet sources, friend’s answers etc. will be penalized.

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Question 1

The following information is given about a hypothetical economy. All values are given in Rs. million.

Consumption C = 450 + 0.7Yd

Investment I = 1300 - 20i

Tax Tx = 350 + 0.25Y

Government Expenditure G = 800

Real money supply M/P = 400

Price Level P = 10

Money demand L = 0.2Y - 20i

Transfer payment Tr = 250

Based on the information given, answer the following questions.

1) Construct the Aggregate Expenditure function (AE) (2 Marks)

2) Find IS and LM functions. (4 Marks)
3) Determine the equilibrium level of national income and the interest rate for this economy.
(2 Marks)
4) Calculate the following multipliers for this economy. (4 Marks)
i. Expenditure multiplier
ii. Tax multiplier
iii. Transfer multiplier
iv. Money multiplier
5) The government has decided to increase the government expenditure by 250 Million Rupees.
Calculate the expected New National Income. (1 Marks)
6) Calculate the crowding out effect of the above policy change, including new interest rate.
(4 Marks)
7) Use the necessary diagrams and graphically illustrate the crowding out effect. (3 marks)
(Total 20 marks)

Question 2

1. Write true or false against each of these statements and justify your answer.
a) Neo-classical economics assumed that the role of the government is required for economic
stability.
b) Macroeconomics gain popularity after the great depression 1929-33.
c) National Income – Indirect tax = Personal income.
d) Nominal GDP is always higher than Real GDP.
e) Autonomous investment depends on the interest rate.
(2 * 5 = 10 Marks)

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 2. Explain using a numerical example how to calculate Gross Domestic Product using “Income
Approach” (05 Marks)
3. Explain using numerical figures in a circular flow diagram inflows and outflows of a closed
economy. (05 Marks)
(Total 20 marks)
Question 3

1. Explain the difference between contractionary fiscal policy and contractionary monetary
policy and its impact towards the economy. (05 Marks)
2. Explain whether the expected income change could be equal to the actual when
implementing an expansionary fiscal policy.
( (05 Marks)
3. Explain which type of inflation is more detrimental to an economy out of demand pulled and
cost pushed inflation with justifications and suitable graphical illustrations. (10 Marks)
(Total 20 marks)
Question 4

1. Suppose a country produces four goods: rice, cloth, cement and cars. The production of the
four commodities in the year 2019-20 was 10000 units, 50000 units, 20000 units and 50 units
respectively. The per unit price of the four commodities is LKR 100, 200, 5000, 2,500,000
respectively.
a. Calculate the Gross Domestic Product (GDP) Nominal for 2019-20 (4 Marks)
b. Assume for the next year 2020-21 for the same production quantities the prices are
150, 100, 5000, 2,600,000 respectively and the country uses 2019-20 prices as the base
in calculating inflation, find the inflation rate for 2020-21 (6 marks)
2. Explain how Aggregate Demand curve is derived with graphical illustrations. (5 Marks)
3. Explain how Sri Lanka should implement fiscal and monetary policies in controlling the high
inflation. (5 Marks)
(Total 20 marks)
Question 5

1. Assume in a hypothetical economy IS equation is Y = 1725 – 45i and Nominal Money supply is
Rs. 450 million and Price level is 5. Money demand equation is Md= 0.25Y – 20i.
a. Calculate the equilibrium National income and the interest rate. (4 Marks)
b. Assume the Sensitivity of speculative demand of money to the interest rate (h) has
increased to 30. Calculate the new equilibrium National income and interest rate
(4 Marks)
2. You are given the following information on a hypothetical economy (all values are in million
rupees)

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 Item Value (Rs.
Millions)

Autonomous consumption 525

Autonomous investment 1200

Government expenditure 450

Government transfer 150

Real money supply 500

Price level 2

Sensitivity of speculative demand for money to interest rate 40

Sensitivity of investment to the interest rate 30

Proportion of money kept for transactional and 0.25

precautionary motives
Additional Information:
Consumers spend 80 percent of their disposable income for consumption and initially
the income tax rate in the economy is 20 percent of the income.

a. Based on the above information write the following equations.

I. Consumption equation
II. Investment equation
III. Money demand equation
IV. Tax function (4 marks)

b. Calculate and interpret the following multipliers

I. Expenditure multiplier
II. Tax multiplier
III. Transfer payment multiplier
IV. Money multiplier (8 marks)

(Total 20 marks)

Question 6

Write short notes on any 4 of the following:

a. Evolution of macroeconomics thought throughout the centuries

b. Application of Business cycles theory to Sri Lanka
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c. GDP (Gross Domestic Product) and NNP (Net National product) using hypothetical figures
d. Control measures for cost pushed inflation
e. Aggregate supply and Aggregate demand

(5 marks each*4 = 20 marks)

- End of the paper -

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