BHAGWAN MAHAVIR UNIVERSITY

BHAGWAN MAHAVIR COLLEGE OF LEGAL EDUCATION

COURSE: BBA LL.B (SEMESTER-4)
EXTRENAL QUESTION BANK
Subject: - Macro Economics
Faculty Name: - Patel Liza
Date:-

Fill in the blanks

1. The continuous flow of money and goods and services between firms and
households is called the Circular Flow.
2. Saving constitute a leakage in the circular flow and investment constitutes an
injection into the circular flow.
3. In closed economy equilibrium occurs investment is equal to saving.
4. Productivity shocks are associated with innovations.
5. The period of high income and employment has been called the period of
prosperity.
6. The alternating periods of expansion and contraction in economic activities are
known as trade cycles.
7. According to Keynes, the level of employment is determined by the level of
effective demand.
8. In order to reach full employment equilibrium, there has to be an increase in
aggregate demand.
9. AD = C + I + G + NX represents aggregate demand in an open economy.
10. The term “Keynesian Cross” was coined by Paul Samuelson.
11. Marginal Propensity to Consume (MPC) is always less than one and cannot be
zero.
12. k = ΔY/ ΔI measures multiplier coefficient.
13. Imports result in a decline in the value of multiplier.
14. The ratio between the net change in consumption expenditure and the induced
investment is known as the acceleration co-efficient.
15. The value of the acceleration co-efficient depends upon the capital- output ratio.
16. The combined effect of multiplier and accelerator is known as Super Multiplier.
Module 2
17. Currency money is termed as high powered money because it is a legal tender.
18. Higher the CRR (Cash Reserve Ratio) lower is the money supply.
19. The money multiplier is measured as mm = 1 + k / r + k.
20. The Radcliff Committee suggested that the money supply should also include the
fund lent by financial institutions.
21. Transaction demand for money is not influenced by interest rate.
22. Keynes describes the desire for money by the people as liquidity preference.
23. Speculative demand for money is interest elastic.
24. The liquidity preference theory was given by J. M. Keynes.
25. The desire of people to hold assets in the form of liquid cash is known as
liquidity preference.
26. Keynes defines interest as the reward for parting with liquidity.
27. The demand for money varies inversely with the rates of interest.
28. According to Keynes, interest rate is determined by the demand for and supply of
money.
29. At a very low rate of interest the liquidity preference curve becomes perfectly
elastic.
30. Current inflation rate is referred to headline inflation.
31. Deficit financing refers to the printing of excess currency notes, by the Central
Bank of the country in order to provide for public expenditure.
32. Government’s budgetary policy during inflation should aim at decreasing
expenditure.
33. A mechanism of wages, prices and contracts that are partially or wholly
compensated for changes in the general price level is termed as indexation.
34. When there is rise in the price due to excess of demand, it is termed as demand-
pull inflation.
35. SLR securities do not include securities issued by private corporations.
36. The value of credit multiplier is 1/CRR.
37. Spread is defined as the difference between interest income and interest
expenses.
38. The cash deposits kept in the bank by the customers are termed as primary
deposits.
39. Every loan creates deposits.
40. The central bank of a country formulates and operates the monetary policy.
41. The main objective of the monetary policy is economic growth with price
stability.
42. Quantitative/ general measures of credit control influence the volume of the
credit.
43. The bank rate policy was first adopted in 1839 by the Bank of England.
44. The national budget determines the allocation of funds for public expenditure.
45. The deliberate changes in taxation and expenditure policy brought about by the
government is termed as the discretionary fiscal policy.
46. Interest payments are non-development revenue expenditure.
47. Public spending during depression is known as compensatory expenditure.
48. Taxation must be progressive to reduce the income and wealth inequalities.
49. IS curve shows the goods market equilibrium.
50. In the liquidity trap case LM curve is horizontal.
51. The point of intersection between IS and LM curve determine rate of interest and
the level of national income.
52. The LM curve slopes upward as the rate of interest varies directly with the
income.
53. The shifts in the LM curve happens with the changes in the money supply and
liquidity preference.
54. The steepness of the IS curve depends on the elasticity of investment demand and
the size of the multiplier.
55. An increase in the Government expenditure leads to rise in the rate of interest and
the level of the national income.
56. When the interest rate falls the investment will increase.
57. When the money supply reduces interest rate rises.
58. Fiscal policy brings out the crowding out effect.
59. GDP is the value of all Final goods and services produced in a given period.
60. When using the income approach to measure GDP, the largest share of GDP
generally consists of Labour income.
61. Expansionary fiscal policy results in increased interest rate and thereby reducing
spending and aggregate demand, and hence crowding out occurs.
62. The LM curve shows different combinations of income and interest rates at which
the money market is in equilibrium.
63. The effects of fiscal policy measures are transmitted to the economy through
various multipliers like investment multiplier and tax multiplier.
64. Fiscal policy is used to bring about creation of infrastructure, improve distribution
of income and wealth, develop priority sector, apart from providing Traditional
facilities to the society.
65. In order to stimulate economic growth during recession, the central bank injects
money into the banking system by purchasing government securities under OMO.
66. To reduce the rate of inflation, policymakers must temporarily raise
Unemployment, and to reduce it they must accept higher inflation.
67. If a country’s exports are larger than its imports, that country’s economy has a
trade surplus.
68. If a country’s imports are larger than its exports, that economy has a trade deficit.
69. If imports and exports are equal, that means the economy has a trade balance.
70. According to classical theory, an economy always operates at full employment
level.
71. The Great Depression of 1929 led to persistent fall in output, employment and
income level.
72. According to Keynesian theory, an economy may function at less than full
employment level.
73. According to Keynesian theory, an economy may function at less than full
employment level.
74. Classical theory is based on assumption that supply creates its own demand
75. M1 in the money stock in India refers to Currency + demand deposits + other
deposits with RBI.
76. LIC and UTI are examples of financial institutions that are not banks.
77. Bank rate policy, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR)
are all examples of quantitative instruments of RBI.
78. Statutory Liquidity Ratio (SLR) refers to that portion of total deposits of a
commercial bank which it has to keep with itself in the form of liquid assets.
79. In order to discourage investment in the economy, the RBI may increase the
bank rate.
80. During depression, it is advisable to lower the bank rate and purchase securities
in the market.
81. If disposable income is 1000 and consumption expenditure is 750, the value of
average propensity to save (APS) will be 0.25.
82. If the marginal propensity to consume (MPC) is 0.6, then the marginal propensity
to save (MPS) will be 0.4.
83. If the saving function is S = -50 + 0.2Y, then the marginal propensity to
consume (MPC) is 0.8.
84. If in an economy investment is greater than saving, the national income of the
economy increases.
85. When aggregate supply exceeds aggregate demand, the level of national income
decreases.
86. If MPC and MPS are equal, the value of the multiplier is 2.
87. The relationship between marginal propensity to save (MPS) and the multiplier is
negative.
88. The situation under which aggregate demand falls short of aggregate supply at full
employment level is called excess supply.
89. Fiscal policy measures such as increasing government expenditure, reducing
taxes, or both can help control deficient demand.
90. Monetary policy measures such as reducing bank rate, purchasing government
securities, and reducing CRR and SLR can help increase aggregate demand.
91. If the budgetary deficit is nil and borrowings and other liabilities are ₹70 crores,
the fiscal deficit is ₹70 crores.
92. When the government meets the gap between public expenditure and public
revenue through borrowing from the banking system, it is called deficit
financing.
93. Budget deficit is the difference between total receipts and total expenditure.
94. Payment of interest is classified as revenue expenditure.
95. If the primary deficit is ₹4400 crore and interest payments are ₹400 crore, then
the fiscal deficit is ₹4800 crore.
96. Eduction in the value of domestic currency through market forces is called
depreciation.
97. If the foreign exchange rate increases, exports will increase.
98. When one country manipulates the exchange rate against the interest of another
country, it is known as dirty floating.
99. Balance of payments is a systematic record of all economic transactions between
one country and the rest of the world.
100. The capital account may include private capital, official capital, and
banking capital.
Short Questions
1. Differentiate between consumption goods and capital goods.
2. Differentiate between final goods and intermediate goods.
3. Differentiate between stock and flow.
4. State whether the following are stock/flow variables and give reasons. i. Money
supply ii. Saving iii. Gross Domestic Product iv. Foreign assets v. Exports vi.
Investment
5. Differentiate between gross investment and net investment.
6. Draw picture and explain showing circular flow of income in a two-sector economy
without financial system?
7. Briefly outline the steps involved in the estimation of national income by income
method.
8. Briefly outline the steps involved in the estimation of national income by expenditure
method.
9. Briefly outline the steps involved in the estimation of national income by value added
method.
10. Explain any four precautions that have to be undertaken while estimating national
income by value added method.
11. Explain any four precautions that have to be undertaken while estimating national
income by expenditure method.
12. State whether the following are included or excluded in the estimation of (a) GDP and
(b) GNP. Give reason also. i) Income earned from smuggling, black marketing or
gambling ii) Interest received by an Indian resident from abroad iii)Interest received
by an Indian resident from abroad
13. Differentiate between Real GDP and Nominal GDP.
14. If Real GDP is 200 and Price Index (with base = 100) is 110, calculate Nominal GDP.
15. The value of the nominal GDP of an economy was 2,500 crore in a particular year.
The value of GNP of that country during the same year, evaluated at the prices of
same base year, was 3,000 crore. Calculate the value of the GNP deflator of the year
in percentage terms. Has the price level risen between the base year and the year
under consideration?
16. Suppose the consumption function is C = 40 + 0.8y. Derive consumption schedule
when income is equal to 0, 100 Cr, 200 Cr, 300 Cr, 400 Cr, 500 Cr and 600 Cr. What
is the breakeven level of income? 1. Also mention APC at this level of income.2.
Show breakeven point on the diagram and mention APC value at breakeven level of
income.
17. Derive savings function from consumption function diagrammatically.
18. Explain any two fiscal measures to solve the problem of excess demand.
19. Explain the working of investment multiplier with the help of a diagram.
20. Explain any two monetary measures to solve the problem of excess demand.
21. Explain the following objectives of a government budget. a) Re-allocation of
resources b) Re-distribution of income and wealth
22. Give the main components of a government budget.
23. Differentiate between revenue expenditure and capital expenditure. Give examples
also.
24. Differentiate between direct taxes and indirect taxes. Give examples also.
25. Differentiate between balance of trade and balance of payment.
26. Differentiate between autonomous and accommodating transactions of balance of
payments account.
27. Show that APC + APS = 1 and MPC + MPS = 1.
28. Define macroeconomics and explain its scope.
29. State any four points showing the importance of macroeconomics.
30. Mention any four limitations of macroeconomics.
31. Explain the concept of national income.
32. Differentiate between national income at current price and at constant price.
33. What is personal income and how is it different from disposable income?
34. Explain any two methods of measuring national income.
35. What are the difficulties involved in the measurement of national income?
36. What is marginal propensity to consume (MPC)? How does it affect the multiplier?
37. What is marginal propensity to save (MPS)? Explain its role in Keynesian theory.
38. How is the rate of interest determined in the liquidity preference theory?
39. Define money and state any four functions of money.
40. Differentiate between M1 and M2 measures of money supply.
41. Differentiate between M3 and M4 measures of money supply.
42. Explain the process of credit creation by commercial banks.
43. Define inflation and describe any two types of inflation.
44. What is deflation? How is it different from inflation?
45. Define stagflation and state its major causes.
46. What is balance of payments? Explain its structure briefly.
47. What are the causes of disequilibrium in the balance of payments?
48. Explain the Macroeconomic identities.
49. State any two problems of Barter system.
50. What role of RBI is known as ‘Lender of Last Resort’?
51. How does the Bank rate influence money supply?
52. State the two motives of Demand for money.
53. Define Liquidity trap.
54. Explain Consumption function with diagram.
55. Explain the Investment function with diagram.
56. Write the meaning of Aggregate demand function. How can it be obtained
graphically?
57. Illustrate the supply side of macro-economic equilibrium with the help of diagram.
58. C=50+0.8Y and I=200 is the information given about a closed economy, a) Calculate
the Equilibrium level of income. b) Suppose I increases by 250, find out the new
equilibrium income.
59. How will you calculate National Income (NI) in an open economy ?
60. Why is macroeconomics important for policy making?
61. Explain the role of government in the circular flow of income in a four-sector
economy.
62. What is the difference between real income and nominal income?
63. Explain the concept of depreciation and its effect on national income.
64. Why is per capita income not an adequate measure of economic welfare?
65. What is autonomous consumption? How does it differ from induced consumption?
66. Explain the relationship between saving and income.
67. What are the assumptions of the Keynesian model of income determination?
68. Distinguish between ex-ante and ex-post investment.
69. Briefly explain the paradox of thrift.
70. What are the primary and secondary functions of money?
71. Explain the concept of high-powered money.
72. What is the role of the central bank in credit creation?
73. Distinguish between demand-pull and cost-push inflation.
74. Explain the impact of inflation on fixed income groups.
75. How does inflation affect the purchasing power of money?
Long Questions
1. Draw a picture showing circular flow and explain of income in a two sector economy
with financial system?
2. Draw a picture showing circular flow explain of income in a three sector economy
with financial system?
3. Explain any four precautions that have to be undertaken while estimating national
income by income method.
4. State whether the following are included or excluded in the estimation of (a) GDP and
(b) GNP. Give reason also. i) Profits earned by a foreign company in India. ii) Salary
paid to Americans working in Indian. iii) Money receives from sale of share iv)
Money received from sale of an old house v) Profits earned by a foreign bank in India
vi) Scholarship received by a student
5. Derive consumption function from savings function diagrammatically.
6. Explain the determination of equilibrium level of income and employment with the
help of a schedule and diagram using AD and AS approach.
7. What are the features of Keynesian theory of employment?
8. What are the types of unemployment? Explain one type.
9. What is Monetary Policy? Explain the methods of monetary policy.
10. Explain the working of investment multiplier with the help of a numerical example.
11. Suppose the savings function is S = - ̅ + (1 - b) Y, where - ̅ = 40 and b = 0.8. Derive
savings schedule when y = 0, 100 Cr, 200 Cr, 300 Cr, 400 Cr, 500 Cr and 600 Cr.
Show the breakeven level of income and the value of APS at this level of income and
diagram.
12. What is super multiplier? Explain the working of super multiplier in explaining the
business cycles.
13. Suppose the GDPMP of a country in a particular year was Rs.3,000 crores. Net Factor
Income from Abroad (NFIA) was Rs. 500 crores. The depreciation was Rs. 450 crores
and the value of Net Indirect taxes (NIT) was Rs. 300 crores. Complete the following
table. Identities Values (Rs. in Crores) GDPMP 3000

14. Suppose the GDPMP of a country in a particular year was Rs. 1000 crores. Net Factor
Income from Abroad (NFIA) was Rs. 100 crores. The depreciation was Rs. 250 crores
and the value of Net Indirect taxes (NIT) was Rs. 200 crores. Answer the following.
Find out the NDPMP
 Find out the GNPMP.
Find out the NNPMP.
Find out the NNPFC.
Which one is called as National Income?
Is GNP always greater than National Income?
15. Discuss the various concepts of national income (GDP, GNP, NDP, NNP, Personal
Income, and Disposable Income) and distinguish between them
16. Explain in detail the income, expenditure, and value-added methods of measuring
national income. Also, mention the difficulties involved in the measurement.
17. Explain the Liquidity Preference Theory of interest rate as given by Keynes. Discuss
its implications for money market equilibrium.
18. Define money. Explain the various functions of money and the different measures of
money supply (M1, M2, M3, M4).
19. What is a business cycle? Explain its main phases and characteristics with the help of
a diagram.
20. Differentiate between monetary and fiscal policy. Explain their objectives and the
tools used to achieve them.
21. What is Balance of Payments (BoP)? Explain its structure and discuss the causes of
disequilibrium and the methods used to correct it.
22. Define macroeconomics. Explain its scope, importance, and limitations in the study of
modern economies.
23. Imagine an economy with only two business firms, XYZ Ltd. and ABC Ltd.
The XYZ Ltd. owns a wheat farm. It sells some of its wheat production directly to the
public and the rest to ABC Ltd., which produces and sells bread.
The following table shows the transactions of each business during a year:
XYZ Ltd. Transactions
Wages paid to employees – ₹60,000
Tax paid to government – ₹20,000
Revenue received from the sale of wheat:
(i) Wheat sold to public – ₹40,000
(ii) Wheat sold to ABC Ltd. – ₹1,40,000
ABC Ltd. Transactions
Wages paid to employees – ₹40,000
Taxes paid to government – ₹8,000
Wheat purchased from XYZ Ltd. – ₹1,00,000
Revenue received from sale of bread – ₹1,60,000
Calculate GDP using the product method.
24. The following data is given for two years — 2011 and 2012 — showing the output
and prices for an economy:

Year Commodity Price (₹) Output (kg)

2011 A 10 60

B 6 80

2012 A 16 100

B 12 140

Calculate the following for the year 2012, taking 2011 as the base year:
Nominal GDP
Real GDP
GDP Deflator
25. Explain the concept of value-added method. How is value added calculated at each
stage of production?
26. How are intermediate goods and final goods treated differently in national income
accounting? Give suitable examples.
27. Differentiate between stock and flow concepts in macroeconomics with examples.
28. What are transfer payments? Why are they not included in the calculation of national
income?
29. What are the differences between nominal GDP and real GDP? Why is real GDP
considered a better measure of economic performance?
30. Explain the concepts of autonomous consumption and induced consumption with the
help of a consumption function.
31. What is the Paradox of Thrift? Explain its significance in a Keynesian framework.
32. Explain the role of government expenditure in determining equilibrium level of
income in the three-sector model.
33. Define inflation. What are the causes and effects of inflation on an economy?
34. What is fiscal policy? Discuss the tools of fiscal policy and how it can be used to
control inflation or recession.
35. Distinguish between current account and capital account in the Balance of Payments.
Give examples of items included in each.

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