0710 Eco (CFA520)[1]

Question Paper Economics (CFA520): October 2007

Answer all questions. Marks are indicated against each question.

1. The demand for most products varies directly with the change in consumer income. Such products are known as

(1 mark)

(a) Normal goods (b) Prestigious goods (c) Complementary goods (d) Inferior goods (e) Substitute goods.

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2. The situation of market equilibrium occurs when

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(a) Demand for the goods is greater than supply of the goods (b) Quantity demanded for the goods equals quantity supplied of the goods (c) The price, sellers ask for the goods is less than the price consumers pay of those goods (d) There exist a shortage of the supply of the goods (e) Demand for the goods is less than supply of the goods.

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3. Essexx Design Inc. produces very costly and attractive sports watches. Now Sofex Inc. introduced a stylish sports watch in the market. The watches of Essexx Design Inc. and Sofex Inc. are considered to be perfect substitutes. The cross elasticity of demand between these watches is

(1 mark)

(a) Infinity (b) Positive, less than infinity (c) Zero (d) Less than zero (e) One.

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4. Which of the following does not cause a shift in the demand curve?

(1 mark)

(a) Change in the price of the good (b) Change in the income of the buyers (c) Change in the personal preferences (d) Change in the price of the related goods (e) Change in the consumer patterns.

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5. The demand and supply functions of a commodity are estimated as Qd = 100 P

Qs = 20 + 3P The equilibrium price and quantity of the good are

(1 mark)

(a) Rs.60 and 40 units respectively (b) Rs.40 and 60 units respectively (c) Rs.50 and 50 units respectively (d) Rs.30 and 70 units respectively (e) Rs.70 and 30 units respectively.

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6. Current demand for apples in a city is 1,000 boxes per week. In the city, price elasticity of demand for apples is 1.25 and income elasticity of demand is 2.00. For the next period, if per capita income is

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expected to increase by 7% and price of apples is expected to increase by 10%, demand for apples is expected to be

(2 marks)

(a) 875 boxes per week (b) 1,000 boxes per week (c) 1,250 boxes per week (d) 1,140 boxes per week (e) 1,015 boxes per week.

7. The falling part of a total utility curve indicates

(1 mark)

(a) Increasing marginal utility (b) Decreasing marginal utility (c) Zero marginal utility (d) Negative marginal utility (e) Indeterminate marginal utility.

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8. The difference between the price an individual is willing to pay and the price he or she actually pays is

(1 mark)

(a) Producer cost (b) Monopolist profit (c) Economic profit (d) Producer surplus (e) Consumer surplus.

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9. Marginal utilities of goods A and B are 500 utils and 1,000 utils respectively. The price of good B is Rs.200. If the consumer is in equilibrium, the price of good A is

(1 mark)

(a) Rs. 60 (b) Rs. 70 (c) Rs. 80 (d) Rs. 90 (e) Rs.100.

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10. If the average product of labor (APL) is 30L L2, the maximum possible total product (TPL) is

(2 marks)

(a) 2,000 units (b) 4,000 units (c) 6,000 units (d) 8,000 units (e) 12,000 units.

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11. Average productivity of labor for a firm is 50 when labor employed is 100 units. When labor employed is increased to 104 units, average productivity of labor declines to 48 units. At current input level the marginal productivity of labor is

(1 mark)

(a) 1 unit (b) 2 units (c) 1 unit (d) 2 units (e) 5 units.

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12. Production function for a firm is Q = 100L 0.1L2. If 10 units of labor are used, average productivity of labor is (a) 90 units (b) 99 units (c) 100 units (d) 200 units

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(1 mark) (e) 220 units.

13. Which of the following represents the Marginal Rate of Technical Substitution (MRTS)?

(1 mark)

(a) Slope of the isocost curve (b) Slope of the indifference curve (c) Slope of the isoquant curve (d) Slope of the budget line (e) Slope of the average cost curve.

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14. Maximum point on the average product curve is reached when

(1 mark)

(a) Marginal product is zero (b) Marginal product is maximum (c) Marginal product is minimum (d) Marginal product is negative (e) Marginal product equals average product.

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15. The point beyond which no rational firm would employ labor is

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(a) When the average product of labor is equal to marginal product of labor (b) When the marginal product of labor is maximum (c) When the marginal product of labor is zero (d) When the total product of labor is zero (e) When the average product of labor is zero.

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16. If the total cost function is TC = 200 4Q + 6Q2 and the output is 4 units, the marginal cost is

(2 marks)

(a) Rs.24 (b) Rs.32 (c) Rs.44 (d) Rs.35 (e) Rs.41.

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17. The cost schedule of a firm is given below:

The average fixed cost of producing 4th unit of output is

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Output (units) Total Fixed Cost (Rs.) Total Variable Cost (Rs.) 1 100 50 2 100 150 3 100 350 4 100 650 5 100 1, 050

(a) Rs.100 (b) Rs. 50 (c) Rs. 20 (d) Rs. 25 (e) Rs.500.

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18. A firm will shut down its operations in the short run if

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(a) It incur losses (b) Fixed costs exceed its revenue (c) Average variable costs exceed its average revenue (d) Total revenue falls short of total cost (e) Total fixed cost exceeds its total variable costs.

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19. Mr. Sachin can earn money from various activities. His hourly earnings from cricket is Rs.5,000, acting Rs.30,000, coaching Rs.10,000 and ceremonies Rs.15,000. The opportunity cost of an hour of coaching for Sachin is

(1 mark)

(a) Rs. 5,000 (b) Rs.10,000 (c) Rs.15,000 (d) Rs.30,000 (e) Rs.40,000.

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20. Increasing marginal costs with increase of output implies

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(a) Decreasing average returns (b) Decreasing average fixed costs (c) Decreasing average variable costs (d) Decreasing total costs (e) Decreasing average costs.

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21. Lixan Imaging is a Mumbai based image digitization company, specializing in digitizing visual collections. It has developed a project-based model incorporating best practices into the digitization workflow. The vertical distance between total variable cost and total cost of Lixan Imaging is equal to

(1 mark)

(a) Marginal cost (b) Average variable cost (c) Total fixed cost (d) Average fixed cost (e) Average total cost.

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22. The total revenue and total cost functions of Nike Shoe Company are

TR = 400Q , TC = 600 +70Q + Q2

What is the profit maximizing output for the firm?

(2 marks)

(a) 100 units (b) 110 units (c) 140 units (d) 180 units (e) 200 units.

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23. Mr. Akash, the manager of The Fast Trak Corp., a shoe manufacturing company develops dozens of dramatically different methods of making shoes, which decreases the Fast Trak Corp.s variable costs of producing shoes. The Fast Trak Corp. faces the following average variable cost function:

AVC = 300 10Q + 0.5Q2

Fixed costs are Rs.150. What is the minimum possible average variable cost?

(2 marks)


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24. In perfect competition, the long run equilibrium price is equal to I. Marginal Revenue. II. Average Cost. III. Marginal Cost.

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IV. Average Revenue.

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(a) Both (I) and (III) above (b) (I), (II) and (III) above (c) (I), (III) and (IV) above (d) (II), (III) and (IV) above (e) All (I), (II), (III) and (IV) above.

25. The horizontal demand curve for a firm is one of the characteristic features of

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(a) Oligopoly (b) Monopoly (c) Monopolistic competition (d) Perfect competition (e) Duopoly.

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26. In the long run, which of the following is true of a firm in a perfectly competitive industry?

(1 mark)

(a) It operates at its minimum average cost (b) The price is more than the average fixed cost (c) The marginal cost is greater than marginal revenue (d) The fixed cost is lower than the total variable cost (e) The price is equal to minimum of average variable cost.

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27. Neelam Pvt. Ltd. is operating in a perfectly competitive industry. If the firm doubles its output during the year, then

(1 mark)

(a) Price of the product falls more than proportionately (b) Price of the product falls less than proportionately (c) Price of the product falls proportionately (d) Price of the product remains same (e) Price of the product rises.

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28. Which of the following conditions are necessary in the short run equilibrium in monopolistic competition?

(1 mark)

(a) Marginal cost = Marginal revenue (b) Price = Average total cost (c) Price = Marginal revenue (d) Price = Marginal cost (e) Price = Average fixed cost.

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29. The following is the cost function of Manish & Co., a sole producer of oil paints. C = 100 + 20Q Manish & Co. can segregate the market into two different sub markets A and B. The demand functions for the two markets are estimated as PA = 50 QA

PB = 30 0.5QB The output at which the monopolist makes the maximum profit is

(2 marks)


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30. Media Soft, a multimedia firm enters a monopolistically competitive market. The demand and cost function faced by Media Soft are given as P = 10,000 20Q TC = 3,00,000 + 2,197Q 20Q2 + Q3 The short run equilibrium output of the firm is

(2 marks)


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31. The industry demand function for a product in a duopoly is P = 500 2Q. The reaction functions of the two firms are as follows:

Q1 = 380 2Q2

Q2 = 200 Q1 Equilibrium price of the product is

(2 marks)


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32. Ring tone, a firm specializing in mobile handsets, faces a monopolistically competitive market. In the long run, the company will earn only normal profits because of

(1 mark)

(a) Advertising outlay incurred for the product (b) Freedom of entry and exit (c) Product differentiation (d) Downward sloping demand curve (e) Small size of the market.

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33. If a monopolist faces an upward shift in marginal cost curve, then

(1 mark)

(a) The price increases and output decreases (b) Both the price and output will increase (c) The price decreases and output increases (d) Both the price and output will decrease (e) Both the price and output will remain constant.

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34. Which of the following is not a common characteristic of perfect competition and monopolistic competition?

(1 mark)

(a) Large number of sellers (b) Free entry (c) Homogeneous product (d) Large number of buyers (e) Free exit.

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35. Best Cereals Inc. (BCI) produces and markets Tasties, a popular ready-to-eat breakfast cereal. The demand and supply functions of Tasties are as follows: QD = 150 3P

QS = 50 +10P

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If excise tax of Rs.3 is imposed on Tasties, the proportion of tax that will be borne by the consumers is

(2 marks)

(a) 88% (b) 77% (c) 63% (d) 56% (e) 44%.

36. The total cost function and demand function of a good are estimated to be TC = 100 5Q + 2Q2 and Q = 100 P respectively. If the current output is 5 units, the average profit is

(2 marks)

(a) Rs. 50 (b) Rs. 60 (c) Rs. 65 (d) Rs. 70 (e) Rs.120.

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37. For a firm, the average cost function is estimated as

AC = + 20 + 4Q.

What is total variable cost for the firm at an output of 15 units?

(2 marks)

(a) Rs. 100 (b) Rs. 750 (c) Rs.1,200 (d) Rs.1,300 (e) Rs.2,100.

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38. In a perfectly competitive market, the marginal revenue curve

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(a) Slopes downward (b) Slopes upward (c) Is vertical (d) Is horizontal (e) Is absent.

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39. The following data is taken from National Income Accounts of a country:

Personal income in the country is

Particulars Million Units of Currency (MUC) GNP at market prices 1,700 Transfer payments 242 Indirect taxes 173 Personal taxes 203 Consumption of capital 190 Undistributed corporate profits 28 Corporate tax 75 Subsidies 20

(a) 1,363 MUC (b) 1,121 MUC (c) 1,230 MUC (d) 1,296 MUC (e) 1,496 MUC.

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(2 marks) 40. The following is the information from National Accounts of an economy:

The GDP at market prices is

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Particulars MUC Direct taxes 2,400 Indirect taxes 11,400 Factor income paid abroad 12,000 Factor income received from abroad 9,000 Depreciation 12,000 Subsidies 6,000 National income 48,000


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41. Which of the following statements is true?

(1 mark)

(a) Net national product at factor cost plus depreciation equals gross national product at market prices

(b) National income minus corporate profits minus personal taxes plus transfer payments equals personal income

(c) Personal disposable income minus personal taxes equals personal consumption (d) Gross domestic product at market prices minus net factor income from abroad equals gross

national product at market prices (e) Per capita income equals the summation of national income and population.

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42. Gross domestic product is the market value of

(1 mark)

(a) All goods and services exchanged in an economy (b) All goods and services exchanged in an economy during a year (c) All final goods and services exchanged in an economy during a year (d) All transactions in an economy during a year (e) All final goods and services produced in an economy during a year.

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43. 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?

(1 mark)

(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.

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44. In an economy the marginal propensity to consume is 0.70 and marginal propensity to import is 10%. Assuming that the investment is autonomous and increases by 1,000 MUC during the year, the income in the economy increases by

(2 marks)

(a) 625 MUC (b) 2,500 MUC (c) 3,000 MUC (d) 4,000 MUC (e) 5,000 MUC.

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45. The consumption function for a two sector economy is C = 1,800 + 0.5Y and investment is an autonomous component. If equilibrium income is 4,400 MUC, what is the investment in the economy?

(1 mark)

(a) 2,600 MUC (b) 200 MUC (c) 400 MUC (d) 2,650 MUC (e) 7,200 MUC.

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46. The investment multiplier explains the change in national product due to change in

(1 mark)

(a) Consumption expenditure (b) Investment expenditure (c) Government expenditure (d) Export (e) Import.

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47. The IS function and LM function in an economy are estimated to be Y = 4,800 + 0.5Y 50i and Y = 4,600+ 400i respectively. The investment function in the economy is 1,600 100i. If the government spending increases by 200 MUC, which of the following is true about the interest rate in the economy?

(2 marks)

(a) Increases from 10.00% to 10.50% (b) Increases from 10.00% to 10.25% (c) Increases from 10.00% to 12.00% (d) Increases from 10.00% to 15.00% (e) Increases from 10.00% to 10.80%.

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48. Which of the following shift the LM curve to the right? I. Increase in money supply. II. Purchase of bonds by the RBI. III. Decrease in the price level.

(1 mark)

(a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.

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49. The IS function and LM function of an economy are estimated to be Y = 2,860 + 0.5Y 60i and Y = 2,600 + 400i respectively. The investment function in the economy is 800 50i. If the government wants to increase the output by 10% by raising the government expenditure, what is the crowding out in the economy?

(2 marks)

(a) 52.5 MUC (b) 55.5 MUC (c) 62.5 MUC (d) 500.0 MUC (e) 100.0 MUC.

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50. Which of the following is true if the prices of factor inputs increase in an economy?

(1 mark)

(a) Aggregate supply curve shifts to the left (b) Aggregate supply curve shifts to the right (c) Aggregate demand curve shifts to the right (d) Aggregate demand curve shifts to the left (e) Both aggregate supply and demand curves remain constant.

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51. In the short run, if an economy emerges from a recession,

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(a) Aggregate demand shifts left, the price level decreases and real output decreases (b) Aggregate demand shifts right, the price level increases and real output increases (c) Aggregate supply shifts right, the price level decreases and real output increases (d) Aggregate supply shifts left, the price level increases and real output decreases (e) Aggregate supply shifts right, the price level increases and real output increases.

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52. The central banks monetary liabilities as on June 30, 2007 stood at 10,500 MUC and Government money at 1,500 MUC. The currency deposit ratio is estimated to be 0.25. If the Central bank intends to maintain the money supply at 48,000 MUC, what should be the reserve ratio specified by the Central bank?

(2 marks)

(a) 6.25% (b) 8.10% (c) 9.10% (d) 5.00% (e) 4.25%.

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53. The following are the excerpts from the balance sheet of the Central bank of a country:

If the government money is 225 MUC, the high powered money in the economy is

(2 marks)

Particulars MUC Notes in circulation 900 Other deposits 450 Other non-monetary liabilities 900 Statutory and contingency reserves 3,780 Credit to Central Government 10,080 Shares & loans to financial institutions 4,950 Central bank claims on Commercial banks 3,150 Net foreign exchange assets 1,350 Other assets 450


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54. As on March 31, 2007, monetary liabilities of the central bank are 1,200 MUC and government money is 50 MUC. If the currency deposit ratio is 0.20 and the central bank specifies a reserve ratio of 5%, money supply in the economy will be

(2 marks)


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55. Which of the following does not affect the balance sheet of Reserve Bank of India?

(1 mark)

(a) Central governments borrowings from RBI (b) Loan taken by one commercial bank from the other (c) Refinancing of NABARD loans (d) Increase in reserves of commercial banks (e) Increase in net foreign exchange assets.

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56. An important difference between the approaches of the Classical economists and Keynesian economists < Answer

to achieve a macroeconomic equilibrium is that

(1 mark)

(a) Keynesian economists actively promote the use of fiscal policy while the classical economists do not

(b) Keynesian economists actively promote the use of monetary policy to improve aggregate economic performance while classical economists do not

(c) Classical economists believe that monetary policy will certainly affect the level of output while Keynesians believe that money growth affects only prices

(d) Classical economists believe that fiscal policy is an effective tool for achieving economic stability while Keynesians do not

(e) Keynesian economists actively promote the use of rational expectations while the classical economists do not.

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57. Which of the following is true for a classical aggregate supply curve?

(1 mark)

(a) Aggregate supply curve is horizontal (b) Aggregate supply curve is positively related to real output (c) Aggregate supply curve is negatively related to real output (d) Aggregate supply curve is unrelated to price level (e) Aggregate supply curve is rectangular hyperbola.

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58. According to Keynesian theory, full employment refers to a situation where there is

(1 mark)

(a) Zero unemployment (b) Natural rate of unemployment (c) Least demand for labor (d) Least supply of labor (e) Demand for goods which is less than supply.

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59. The Chief Economist to the Government told the Cabinet that the people cannot be influenced if the government increases its spending during election years, as people will anticipate this kind of behavior as previous governments used to do so. The economist is an advocate of

(1 mark)

(a) Classical economics (b) Rational expectations (c) Keynesian economics (d) Supply-side economics (e) Monetarism.

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60. Unemployment that results from the normal workings of the labor market is a combination of

(1 mark)

(a) Frictional and structural unemployment (b) Cyclical and structural unemployment (c) Frictional and cyclical unemployment (d) Frictional and disguised unemployment (e) Higher quantity demanded and lower quantity supplied in the labor market.

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61. Which of the following would you suggest to counter a recession?

(1 mark)

(a) Decrease in government expenditure (b) Decrease in transfer payment (c) Decrease in the discount rate (d) Decrease in the money supply (e) Increase in the tax rate.

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62. Which of the following is not a major determinant of economic growth? (a) Tastes and preferences of consumers (b) Technological advancement

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(1 mark)

(c) Natural resources (d) Physical capital (e) Human resources.

63. Inflation accompanied by a slowing of economic activity is

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(a) Known as deflation (b) A result of a stagnant aggregate supply (c) A result of fiscal stimulus (d) Known as stagflation (e) Known as a recession.

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64. The Phillips curve shows the short run trade off between

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(a) Inflation and unemployment (b) Unemployment and output (c) Inflation and the nominal interest rate (d) The nominal interest rate and investment (e) Inflation and output.

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65. Economic growth is said to have occurred when there is an increase in

(1 mark)

(a) Interest rate (b) Aggregate demand (c) The rate of inflation (d) Productive capacity (e) Wage rate.

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66. Which of the following policy measures is considered as fiscal policy measures?

(1 mark)

(a) The government cuts taxes or raises spending to get the economy out of a slump (b) The government changes the quantity of money supplied to affect the price level, interest rates,

and exchange rates (c) The government stimulates aggregate supply to stimulate the potential growth of output and

income (d) The government changes the statutory liquidity ratio (e) The government restricts imports and stimulates exports.

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67. Expansionary monetary policy affects the goods market because

(1 mark)

(a) It raises interest rates and leads to lower investment spending (b) It lowers interest rates and raises investment spending (c) It leads to an expansionary fiscal policy (d) It lowers both interest rates and investment spending (e) It lowers both interest rates and exports.

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68. If the government increased its spending and the Reserve Bank of India increased the money supply, which of the following would we expect to happen in the short run?

(1 mark)

(a) Increases in both output and the price level (b) A decrease in output and an increase in the price level (c) Decreases in both output and the price level (d) Ambiguous changes in both output and the price level (e) A decrease in price level and an increase in output.

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69. A current account deficit implies that (a) There is net debit balance in the merchandise account

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(1 mark)

(b) There is net credit balance in the merchandise account (c) Foreign exchange outflows on account of imports of goods and services and gifts made exceed

inflows on account of exports of goods and services received (d) Decrease in Foreign Exchange Reserves (e) Increase in Foreign Exchange Reserves.

70. Which of the following is true if, for a given period, there is no change in the foreign exchange reserves of a country?

(1 mark)

(a) Balance in the current account is equal to the balance in capital account (b) Surplus (deficit) in the current account is equal to deficit (surplus) in the capital account (c) Current account balance is zero (d) Trade balance is zero (e) Capital account balance is zero.

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71. In balance of payments statement, short term inflows and outflows of capital are recorded in

(1 mark)

(a) Current account (b) Capital account (c) Official reserves account (d) Errors and omissions account (e) Transfer payments account.

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72. Who among the following will be benefited most from unanticipated inflation? I. Creditors. II. Debtors. III. Retirees earning fixed income. IV. Employees whose salaries are linked to the consumer price index.

(1 mark)

(a) Only (I) above (b) Only (II) above (c) Both (I) and (II) above (d) Both (II) and (III) above (e) Both (III) and (IV) above.

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73. Which of the following best describes an expansionary fiscal policy?

(1 mark)

(a) Increase in government spending and increase in money supply (b) Increase in government spending and decrease in taxes by the same amount (c) Decrease in government spending and decrease in money supply (d) Decrease in government spending and increase in taxes (e) Increase in government spending and increase in taxes.

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74. In the short run, an increase in the governments budget deficit is most likely to reduce

(1 mark)

(a) Interest rate (b) Inflation (c) The demand for imported goods and services (d) Unemployment (e) Money supply.

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75. The following information is available from balance of payments of an economy:

The foreign exchange reserves of the country will

Item MUC Trade balance 5,000 Current account balance 2,000 Capital account balance 7,000

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(2 marks)

(a) Decrease by 5,000 MUC (b) Decrease by 2,000 MUC (c) Remain unchanged (d) Increase by 5,000 MUC (e) Increase by 2,000 MUC.

76. Financial assets of the RBI does not include

(1 mark)

(a) RBIs credit to government (b) Credit to commercial banks (c) RBIs credit to commercial sector (d) Net foreign exchange assets with RBI (e) Furniture and buildings of RBI.

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77. The following information is taken from Union Budget for the year 2006: Rs.(crore)

The revenue deficit for the year 2006 was

(2 marks)

Revenue Receipts Tax Revenue (Net) 1,72,965 Non-tax Revenue 72,140 Capital Receipts Recoveries of Loans 17,680 Other Receipts 12,000 Borrowings & Other Liabilities 1,35,524 Non-plan Expenditure On Revenue Account 2,70,169 (Of which, interest payments is Rs.1,17,390 crore) On Capital Account 26,640 Plan Expenditure On Revenue Account 70,313 On Capital Account 43,187

(a) Rs.95,300 crore (b) Rs.95,377 crore (c) Rs.90,300 crore (d) Rs.94,500 crore (e) Rs.97,735 crore.

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78. Consider the following information:

The current account balance for the country is

(2 marks)

Particulars MUC Earnings on loans and investments from abroad 500 Earnings on loans and investments to abroad 2,200 Import of services 4,000 Private remittances to abroad (transfers) 500 Private remittances from abroad (transfers) 500 Exports of services 2,000 Merchandize exports 15,000 Merchandize imports 12,000

(a) 700 MUC (Surplus) (b) 700 MUC (Deficit) (c) 500 MUC (Deficit) (d) 500 MUC (Surplus) (e) Zero.

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Suggested Answers Economics (CFA520): October 2007

1. Answer : (a) Reason : In case of normal goods, a given increase in income results in increase of demand. Normal goods can

be further classified into luxury good or necessary goods based on the value of the income elasticity of demand. If the value of income elasticity is more than one, it signifies that the good is a luxury item. Since, the value of the income elasticity of demand is not known; we can classify the good to be normal goods. a. In case of normal goods the quantity demanded increases/decreases with the increase/decrease

in the income levels of the consumers. b. In case of necessities, though there would be positive change in the quantity demanded of the

good for a given change in the income, the percentage change in the quantity demanded would be less than the percentage change in the income. Since, we do not know the value of the income elasticity of demand; we cannot classify the good as luxury or necessary good.

c. Complementary goods are those which are jointly used to satisfy a want. Cross elasticity of demand, and not income elasticity of demand, is used to determine the relationship between the two goods.

d. In case of inferior goods percentage change in the quantity demanded is negative with the change in the income. Hence, (d) is not the correct answer.

e. In case of Luxury goods, the percentage change in quantity demanded is greater than the percentage change in the income. Since, we do not know whether the percentage change in quantity demanded is greater than the percentage change in the income, we cannot classify the good to be luxury good.

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2. Answer : (b) Reason : When total quantity demanded in the market equals total quantity supplied, the market is said to be

in equilibrium.

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3. Answer : (a) Reason : The cross-elasticity of demand between two perfect substitutes is infinity. Here, the smallest possible increase (decrease) in the price of one good causes an infinitely large

increase (decrease) in the quantity demanded of other good.

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4. Answer : (a) Reason : Movement of the demand curve implies that the change in the price of the good will lead to change

in the demand for the good. For instance, fall in the price leads to extension in the demand curve. Similarly increase in the price of good leads to contraction in the demand for the good. A shift in the demand curve is caused by a change in any non-price determinant of demand. The curve can shift to the right or left. The factors that are responsible for shift in the demand curve may be listed out as follows: Income of the consumers prices of other goods (substitutes or complements) Tastes and preferences of consumers. a. It is appropriate in this instance because it is not the factor that is responsible for the shift in the

demand curve but it represents the movement along the demand curve. b. It is not appropriate in this instance because it is one of the factors that is responsible for shift in

the demand curve. c. It is not appropriate in this instance because it is one of the factors that is responsible for shift in

the demand curve. d. It is not appropriate in this instance because it is one of the factors that is responsible for shift in

the demand curve. e. It is not appropriate in this instance because it is one of the factors that is responsible for shift in

the demand curve. The correct answer is (a).

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5. Answer : (d) Reason : 100 P = - 20 + 3P

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or P = Rs.30 Q = 100 P = 100 30 = 70 units.

6. Answer : (e) Reason : Qd = 1000

ep = 1.25

ey = 2.00

ed =

1.25 =

% change in Q = 12.5%

ey =

2.00 =

% change in Q = 14.00% Net effect is = 14.00 12.5 = 1.5% 1000 1.5% = 15

Demand for apple is expected to be = 1000 + 15 = 1015 boxes per week.

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7. Answer : (d) Reason : When marginal utility becomes negative, it implies that the total utility has start diminishing

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8. Answer : (e) Reason : Consumer surplus is the difference between the willingness price and actual price for a consumer.

a. Producer costs represent the cost incurred by the producer in producing the good. b. Monopolist Profit: Economic profit generated as a result of a firms market control. Its termed

monopoly profit as a reflection of the most prominent market structure with market controlmonopoly.

c. Economic Profit: The difference between business revenue and total economic cost. This is the revenue received by a business over and above the minimum needed to produce a good.

d. Producers Surplus: The revenue that producers obtain from selling a good over and above the opportunity cost of production. This is the difference between the minimum supply price that sellers would be willing to accept and the price that is actually received.

e. Consumer Surplus is the satisfaction that consumers obtain from a good over and above the price paid. This is the difference between the maximum demand price that the consumer would be willing to pay and the price that he actually pays.

The correct answer is (e).

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9. Answer : (e)

Reason :

PA = = Rs.100.

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10. Answer : (b) Reason : APL= 30L L

2

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TPL = APL L = 30L2 L3

TPL can be maximized when MPL = 0

Therefore, TPL / L = 60L 3L2 = 0

L (60 3L) = 0 L =0 or L = 20. Output can be maximized by employing 20 labors. Maximum possible TPL = 30(20)2 (20)3 = 12,000 8,000 = 4,000 units.

11. Answer : (b) Reason : TP (when labor = 100 units) = 100 x 50 = 5000

TP (When labor = 52 units) = 104 x 48 = 4992 Thus, MP = (4992 5000)/(104 100) = -8/4= -2 unit.

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12. Answer : (b) Reason : The production function for a firm Q = 100L 0.1L2

APL = = 100 0.1 L.

When L = 10, APL = 100 0.1(10) = 100 1 = 99 units.

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13. Answer : (c) Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS) between

labor (L) and capital (K). MRTS is equal to the ratio of the marginal productivities of two factors. a. The slope of the isocost curve represents ratio of wages (w) and interest (r). b. The slope of the indifference curve signifies marginal rate of substitution of goods (MRS). c. The slope of the isoquant curve signifies the marginal rate of technical substitution (MRTS)

between labor and capital. d. The slope of the budget line represents ratio of price of good X and good Y. e. The slope of the average cost curve only shows the rate of change in average cost curve with

respect change in output.

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14. Answer : (e) Reason : When marginal product (MP) is greater than average product (AP), AP will be increasing. When MP

< AP, AP will be decreasing. Therefore, AP is maximum when AP is equal to MP. When MP=0, total product is maximum and AP will be decreasing. Hence option (a) is not the answer.

When MP is maximum, AP is less than MP and AP will be increasing. Hence option (b) is not the answer.

When MP is minimum, AP will be decreasing. Hence option (c) is not the answer. When MP is negative, AP will be decreasing. Hence option (d) is not the answer.

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15. Answer : (c) Reason : A rational firm always employs labor up to the point when the marginal product of labor is zero. If

the firm employs beyond that point, it reduces the efficiency of the fixed factors, which results in a fall in the total product instead of rising. (a) Is not the answer because a rational firm will employ labor when the average product of labor

is equal to marginal product of labor. (b) Is not the answer because a rational firm will employ labor when the marginal product of labor

is maximum. (c) Is the answer because no rational firm would employ labor when the marginal product of labor

is zero. (d) Is not the answer because when the labor is zero, the total product of labor will be zero. (e) Is not the answer because when the labor is zero, the average product of labor will be zero

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16. Answer : (c) Reason : When Q = 4, MC = 12Q 4 = 12(4) 4 = 44.

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17. Answer : (d) Reason : AFC = TFC/Q

Average Fixed Cost of Producing 4 units = 100/4 =Rs.25

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18. Answer : (c) Reason : When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting down its

operations. Even if its fixed costs exceed its revenue, the firm may not shut down its operations because the firm can reduce its fixed cost loss through sales.

a. In the short run, the firms will continue their operations even though they incur losses. b. If the revenue is more than variable costs, it can reduce the losses caused by fixed costs. c. When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting

down its operations d. If total revenue is more than total costs it signifies losses. In the short run, the firms will

continue their operations even though they incur losses. e. Revenue is more important to take a decision on continuation of operation.

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19. Answer : (d) Reason : Opportunity cost of an hour of coaching for Sachin is equal to the best opportunity forgone because

of coaching i.e. acting Rs.30,000.

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20. Answer : (b) Reason : a. When marginal cost is increasing with the increase of output, average returns may be

increasing or decreasing. b. When output is increasing, average fixed costs decreases whether or not marginal cost is

increasing or decreasing. c. When marginal cost is increasing with the increase of output, average variable costs may be

increasing or decreasing. d. When MC is rising, TC also increases e. When marginal cost is increasing with the increase of output, average costs may or may not

increasing.

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21. Answer : (c) Reason : The total cost curve is deduced from the total fixed cost and the total variable cost. The total cost is

represented as the vertical integration of the total fixed cost and total variable cost. So, the vertical distance between TVC and TC is equal to total fixed cost. (a) Is not the answer because the vertical distance between TVC and TC is not equal to marginal

cost. (b) Is not the answer because the vertical distance between TVC and TC is not equal to average

variable cost (c) Is the answer because the vertical distance between TVC and TC is equal to total fixed cost (d) Is not the answer because the vertical distance between TVC and TC is not equal to average

fixed cost. (e) Is not the answer because the vertical distance between TVC and TC is not equal to average

total cost.

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22. Answer : (b) Reason : Profit maximizing output is determined where MR = MC. MR= 400 Q

MC = 70 + 2Q 400 Q = 70 + 2Q 3Q = 330 Q = 110 units.

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23. Answer : (b)

Reason : Minimum possible AVC is where =0

But = 10 + Q

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But = 10 + Q

10 + Q = 0 Q = 10 AVC = 300 10 (10) + 0.5 (10)2 =Rs. 250.

24. Answer : (e) Reason : The demand curve is horizontal to x-axis implies that the producers can produce as much as quantity

of output to the given level of price. Therefore, the producer under perfect competition is a price-taker. The long-run equilibrium, all the existing firms get normal profits because of free entry and exit of firms. Hence the equilibrium condition in the long run for a firm would be P = AR = MR = MC.

Hence, the correct answer is (e).

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25. Answer : (d) Reason : Perfect competition is a form of market structure which represents a market without rivalry among

the individual firms. When the product is similar and identical, given all other conditions, a perfectly competitive firm can only be a price taker. The price of the good is determined by the market forces. The demand curve is horizontal to x-axis implying that the producers can produce as much as quantity of output to the given level of price.a.Oligopoly is a form of market structure where there are few sellers. The demand curve is indeterminable because of the interdependence between the firms and it depends on the reaction curves of the competitor.b.Monopoly is a form of market structure where there is only one producer of the good. The demand curve is downward sloping implying that the producer is a price-maker. The distinguishing feature of this form of market structure is that the average costs of production continually decline with increased output as a result of which average costs of production will be lowest when a single large firm produces the entire output demanded.c.Monopolistic competition is a market structure where there are many firms selling closely related but non-identical goods. The demand curve is downward sloping because of product differentiation.d.The demand curve in the perfect competition is horizontal to x-axis implying that producer can produce as much as the quantity of output for a given level of price.e.The demand curve of a duopolist is indeterminate because of high degree of interdependence between the firms. Hence, the correct answer is (d).

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26. Answer : (a) Reason : A perfectly competitive firm cannot earn abnormal profits in the long run because new firms enter

into the industry and competition reduces the price of the good. Conversely, when the firm gets losses in the long run, it would move out of the industry. Thus, an existing firm only gets normal profits in the long run. In perfect competition, normal profit is possible only when the firm operates at its minimum average cost. a. In perfect competition, normal profit is possible only when the firm operates at its minimum

average cost. b. It is not appropriate in this instance because in the long-run all inputs are variable and there are

no fixed costs. c. It is not appropriate in this instance because marginal cost greater than marginal revenue is not

a desirable situation for a firm to continue in the industry. d. It is not appropriate in this instance because fixed cost lower than total variable cost does not

indicate any thing. Further, there would be no fixed costs in the long-run. e. It is not appropriate because P = Min. AVC only indicates shut down point in the short run. Hence, the correct answer is (a).

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27. Answer : (d) Reason : There exists large number of buyers and sellers in a perfectly competitive industry. When there are

large number of buyers and sellers no individual seller, however large, can influence the price by change the output. Since the firm is operating in a perfectly competitive market, the price remains the same even if the firm doubles its output. (a) Is not the answer because in a perfectly competitive industry, if the firm doubles its output

during the year, then price of the product does not fall more than proportionately (b) Is not the answer because in a perfectly competitive industry, if the firm doubles its output

during the year , price of the product does not fall less than proportionately

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(c) Is not the answer because in a perfectly competitive industry, if the firm doubles its output during the year price of the product does not fall proportionately

(d) Is the answer because in a perfectly competitive industry, if the firm doubles its output during the year, price of the product remains same

(e) Is not the answer because insufficient data cannot be the answer. 28. Answer : (a)

Reason : Each firm is earning only normal profits that is the point where, marginal revenue = marginal cost. < TOP >

29. Answer : (c) Reason : MRA = MC;

TRA = 50QA QA2

MRA = 50 2QA 50 2QA =20 QA = 15; TRB = 30QB 0.5QB2;

MRB = 30 QB; MRB = MC;30 QB = 20; QB = 10; Total output, Q = 15 + 10 = 25 units.

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30. Answer : (b) Reason : Given, P = 10,000 20Q

TC =300,000 + 2197Q 20Q2 + Q3 TR = P.Q = 100,00Q 20Q2 MR =10,000 40Q MC = 2,197 40Q +3Q2 MR = MC gives 10,000 40Q = 2,197 40Q + 3Q2 or 7803 = 3Q2 Q 2 = 2601 which gives Q = = 51

Hence the correct answer is 51 units

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31. Answer : (a) Reason : By solving the reaction functions of the firms, the industry output can be derived.

Q1 = 380 2Q2 (I) Q2 = 200 Q1 (II) Putting the equation (II) in (I) Q1 = 380 2 (200 Q1) or, Q1 = 380 400 + 2Q1 or, Q1 = 20 or, Q1 = 20. Q2 = 200 20 = 180.

The equilibrium output for the industry Q = Q1 + Q2 = 20 + 180 = 200. P = 500 2(200) = Rs.100.

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32. Answer : (b) Reason : (a) It is not the answer as economies of scale just means advantages of large-scale production. The

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reason for tangency of price with average cost curve is that there is freedom of entry and exit of firms. (b) It is the answer as freedom of entry ensures that all firms earn only normal profits while exit

ensures that the loss making firms exit the industry and the others make normal profits. (c) It is not the answer as product differentiation is not a reason for the firms attaining normal

profits. (d) It is not the answer as downward sloping demand curve does not in itself mean normal profits (e) It is not the answer, as a downward sloping demand curve in itself does not mean normal

profits. Hence the correct answer is (b)

33. Answer : (a) Reason : When a monopolist faces an upward shift in his marginal cost curve, the price of his product will

increase while the quantity demanded will decrease

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34. Answer : (c) Reason : The difference between perfect competition and monopolistic competition is with regard to type of

product which they produce. Producer under perfect competition produces homogeneous goods while the producer operating under the conditions of monopolistic competition produces differentiated products. Large number of sellers is a common characteristic feature of both perfect competition and monopolistic competition. Free entry and exit is also common characteristic feature of perfect and monopolistic competition. Homogeneous product is the characteristic feature of only perfect competition. Differentiated product is the characteristic feature of monopolistic competition. Hence it is not the common feature of perfect and monopolistic competition. Large number of buyers is also common characteristic feature of both perfect competition and monopolistic competition. Large number of sellers and homogeneous product are the features of perfect competition. Hence the correct answer is (c).

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35. Answer : (b) Reason : When tax is imposed,

Qs = 50 + 10(P 3) = 50 + 10P 30 Or, Qs = 20 + 10P At equilibrium, 20 + 10P = 150 3P Or, 13P = 130 P = 10 Earlier equilibrium price, 150 3P = 50 + 10P Or, 100 = 13P Or, P = 100/13 = 7.7

Increase in price = 10 7.7 = Rs.2.3. Thus, the burden borne by the consumer is 2.3/3 = 76.67% = 77%

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36. Answer : (d) Reason : Profit = TR TC

TR = P x Q P = 100 Q Hence, TR = (100 Q) Q = 100Q Q2 Hence, profit = 100Q Q2 (100 5Q + 2Q2) Average profit function: 100 Q 100 /Q +5 2Q Thus, if current output is 5 units, average profit will be 100 5 20 +5 10 = 70.

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37. Answer : (c) Reason : AC = 100/Q + 20 + 4Q TC = 100 + 20Q + 4Q2 TVC = 20Q + 4Q2

At output 15, TVC = 20(15) + 4(15)2

= 300 + 900 =Rs. 1200

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38. Answer : (d) Reason : Perfect competition is a form of market structure which represents a market without rivalry among

the individual firms. The characteristics of perfect competition are: Large number of buyer and sellers Homogeneous product No barriers to entry Perfect information Perfect mobility of factors of production. There are large numbers of buyers and the demand curve which is the marginal revenue curve is horizontal to the x-axis implying that the producer can produce as much as the quantity of output for a given level of price. All the additional goods can be sold at the market price only, hence in a perfect competition, P = MR = AR. Hence the correct answer is (d).

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39. Answer : (e) Reason : Personal Income = National Income Undistributed corporate profit corporate tax + Transfer

payments National Income = GNP at market price Depreciation (consumption of capital) Indirect taxes +

Subsidies = 1,700 190 173 + 20 = 1,357 Personal Income = 1,357 28 75 + 242 = 1,496 MUC

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40. Answer : (c) Reason : National income = NNP at factor cost

NNP at factor cost = GDP at market price Indirect taxes + subsidies + NFIA Depreciation Or, GDP at market price = NNP at factor cost + Indirect taxes subsidies - NFIA + Depreciation = 48000 + 11400 6000 ( 3000) + 12000 = 68400 MUC.

Where NFIA = (Factor income received from abroad Factor income paid abroad) = (9000 12000) = -3000 MUC

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41. Answer : (b) Reason : National income minus corporate profits minus social security taxes plus transfer payments equal

personal income. This is the true statement.

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42. Answer : (e) Reason : Gross domestic product is the market value of all final goods and services produced in an economy

during a one-year period.

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43. Answer : (d) Reason : If Yd is zero, consumption is Rs. 1000, which is autonomous consumption. This consumption is

financed by dissavings or borrowing. Hence dissavings are Rs.1000

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44. Answer : (b)

Reason : Multiplier = 1/(1 MPC + MPI) = 1/(1 0.70 + 0.1) = = 2.5

Thus if investment increases by 1,000, income increases by 1000 2.5 = 2,500 MUC.

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45. Answer : (c) Reason : Y = C + I Y = 1800 + 0.5 Y + I 0.5 x 4400 = 1800 + I I = 400.

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46. Answer : (b) Reason : The investment multiplier explains the change in national product due to change in investment

expenditure.

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47. Answer : (e) Reason: At equilibrium, IS = LM

Y = 4800 + 0.5Y 50i Y = 9600 100i IS function

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Y = 4,600+ 400i LM function Thus at simultaneous equilibrium, 9600 100i = 4,600+ 400i Or, 5000 = 500i Or, I = 10.00 When government spending increase by 200, the IS function becomes 0.5Y= (4800 + 200) 50i 0.5Y = 5000 50i Or, Y = 10000 100i Thus, at equilibrium, 4,600+ 400i = 10000 100i Or,500i = 5400 Or, I = 10.80.

48. Answer : (e) Reason : An increase in nominal money supply, a decrease in the price level, or a purchase of bonds by the

RBI increases real money stock, which shifts the LM curve to the right.

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49. Answer : (c) Reason : At simultaneous equilibrium,

0.5Y = 2860 60i (or) Y = 5720 120i is equal to Y = 2600 + 400i Or, 5720 120i = 2600 + 400i Or, 3120 = 520i Or, i = 6 Thus, Y = 2600 + 400(6) = 5000 When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500, then using LM function, 400i = 5500 2600 (or) i = 7.25% Initial investment = 800 50(6) = 500 New investment = 800 50(7.25) = 437.5 Change in investment = 500 437.5 = 62.5.

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50. Answer : (a) Reason : Aggregate demand (supply) curve is a curve showing relationship between the level of real domestic

output demanded (available) at each possible price level. The aggregate demand shows the overall demand for goods and services produced in a country. Thus, AD = C + I + G + NE. A shift in the aggregate demand curve takes place if the any of the factor other than price levels affect the aggregate demand. Aggregate supply, on the other hand, shows the overall supply of goods and services at various price levels. Any factor other than price level that affect the aggregate supply results in shift in aggregate supply curve. Increase in the factor input prices reduces the incentive for production that lead to reduction in aggregate supply. A reduction in supply because of any other factors other than price level is shown by a leftward shift in the aggregate supply curve. A shift in the aggregate demand curve is caused by changes in the consumption spending, investment spending, government spending and net export spending. Changes in the prices of factor inputs do not affect aggregate demand. Hence, statement (a) is correct.

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51. Answer : (b) Reason : If an economy is reviving from a recession, in the short run, there will be an increase in the demand.

This increase in demand causes an increase in price which in turn results in a rise in real output.

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52. Answer : (a) Reason : High powered money = monetary liabilities + government money = 10,500 + 1,500 = 12,000

Ms = H

48,000 = 12,000

= (1 + 0.25)/(0.25 + r) = 4

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= 1 + 4r = 1 + 0.25 4r = 0.25 r = 0.0625 = 6.25%.

53. Answer : (e) Reason : High powered money = Monetary liabilities of central bank + Government money

Monetary liabilities of central bank = Financial Assets + Other assets Non-monetary liabilities Financial Assets = Credit to government + claims on commercial banks + credit to commercial sectors + foreign exchange assets = 10,080+ 3,150 + 4,950 + 1,350= 19530 Non-monetary liabilities = 900+ 3780 = 4680 Monetary liabilities of central bank = 19,530 + 450 4,680 = 15,300 High powered money = 15,300 + 225 = 15,525 MUC

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54. Answer : (c) Reason : Stock of high powered money ( H)

= monetary liabilities of the central bank + government money = 1,250 MUC Current deposit ratio (Cu) = 0.20 Reserve ratio (r) = 0.05

Money supply Ms =

=

= 4.8 1,250 = 6,000 MUC

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55. Answer : (b) Reason : The balance sheet of Reserve Bank of India contains particulars of Banks current assets and

liabilities. (a) Is not the answer because Central governments borrowings from RBI constitutes assets of

RBI.It will affect the balance sheet. (b) Is the answer because loan taken by one commercial bank from the other is a inter bank loan. It

will not affect the balance sheet of the Reserve Bank of India. It is neither a liability nor an asset to the RBI.

(c) Is not the answer because refinancing of NABARD loans constitutes assets of RBI. (d) Is not the answer because increase in reserves of commercial banks increases the liabilities of

RBI. (e) Is not the answer because increase in net foreign exchange assets increases the assets of RBI.

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56. Answer : (a) Reason : An important difference between the approaches of the classical and Keynesian economists use to

achieve a macroeconomic equilibrium is that Keynesian economists actively promote the use of fiscal policy; the classical economists do not. Classical economists believe intervention can be de-stabilizing and advocate laissez- faire economy. Therefore the answer is (a).

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57. Answer : (d) Reason : According to classical economist, aggregate supply curve is a vertical straight line. Hence it is

unrelated to the price level.

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58. Answer : (b) Reason : According to Keynesian theory the term full employment refers to a situation where there is natural

Rate of unemployment.

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59. Answer : (b) Reason : According to rational expectations school, discretionary monetary and fiscal policy cannot be used to

stabilize the economy. Proponents of rational expectation argue that consumers and business firms

< TOP >

anticipate the implications of rise in government spending. Moneywage rate and prices will rise, but output and employment will remain the same. So government can no longer fool the people by increasing its spending during elections years. So the answer is (b).

60. Answer : (a) Reason : Frictional unemployment is a short-run job/skill matching problem while structural unemployment is

a long-run matching problem.

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61. Answer : (c) Reason : To counter the recession the fiscal and monetary policies should be expansionary.

a. Decrease in government expenditure is a contractionay fiscal policy. This measure will worsen the recessionary situation.

b. Decrease in government expenditure is a contractionay fiscal policy. This measure will worsen the recessionary situation.

c. Decrease in the discount rate increase money supply in the economy and is an expansionary monetary policy. This will counter the recession by increasing the aggregate demand in the economy.

d. Decrease in money supply is a contractionary monetary policy. This measure will worsen the recessionary situation.

e. Increase in the tax rate is a contractionary fiscal policy. This measure will worsen the recessionary situation.

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62. Answer : (a) Reason : Economic growth refers to situation where increased productive capabilities of an economy are made

possible by either an increasing resource base or technological advance. A country, thus, can achieve economic growth through: a. Improvement in technology b. Natural resources c. Capital d. Human resources

Change in tastes and preferences of consumers only affect the demand of an individual good or services, and it does not increase the production capabilities of an economy.

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63. Answer : (d) Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.

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64. Answer : (a) Reason : Phillips curve in the short-run shows an inverse relation between inflation and unemployment. But in

the long run there is no trade-off because Phillips curve is vertical in the long-run.

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65. Answer: (d) Reason: Economic growth, by definition, is said to occur hen there is an increase in the productive capacity

of the nation, shifting the production possibility frontier to the right.

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66. Answer : (a) Reason : Fiscal policy refers to policies pertaining to government spending and taxation. The overall conduct

of these policies play an important role in maintaining economic stability in the economy.

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67. Answer : (b) Reason : Expansionary monetary policy effects the goods market because it lowers interest rates and raises

investment spending.

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68. Answer : (a) Reason : If the government increased its spending and the Reserve Bank of India increased the money supply,

it will lead to increases in both output and the price level in the short run.

< TOP >

69. Answer : (c) Reason : Current account captures the transactions related to trade in goods and services, transfer payments

and factor incomes. If foreign exchange out flow on account of these is more than inflows, the current account is in deficit.

< TOP >

70. Answer : (b) Reason : Because of the double entry concept underlying the recording of transactions, BoP account must

always be in balance. Thus, Balance in current account + Balance in capital account + Change in

< TOP >

reserves = Zero. When there is no change in the foreign exchange reserves, then balance in current account + balance in capital account = zero (or) balance in current account = - (balance in capital account). a. Balance in current account + Balance in capital account = Change in reserves. When balance in

current account + balance in capital account is zero, then balance in the current account = Negative balance in capital account. Hence, statement (a) is not correct.

b. There will be no change in the foreign exchange reserves of a country only when surplus (deficit) in current account is equal to deficit (surplus) in capital account.

c. Current account balance may or may not be zero when the change in foreign exchange reserves of a country is zero.

d. Trade balance (exports imports) may or may not be zero when the change in foreign exchange reserves of a country is zero.

e. Capital account balance may or may not be zero when the change in foreign exchange reserves of a country is zero.

71. Answer : (b) Reason : Though the outflows or inflows of capital are short term, they are still recorded in the capital

account.

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72. Answer : (b) Reason : The real value of repayments in the future will fall with an increase in the inflation causing an

increase in the wealth of the debtors. With the same reasoning the wealth of the creditors, retirees on fixed income, employees whose salaries are linked to the CPI will decrease for an increase in the rate of inflation.

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73. Answer : (b) Reason : Expansionary fiscal policy refers to increase in government spending and decrease in taxes.

< TOP >

74. Answer : (d) Reason : When the budget deficit increases, there is higher expenditure undertaken by the government, which

will mean more public work projects. This will further boost employment and reduce unemployment.

< TOP >

75. Answer : (d) Reason : Change in foreign exchange reserves = Current account balance + Capital account balance = 2,000 + 7,000 = 5,000 MUC. i.e. increase by 5,000 MUC.

< TOP >

76. Answer : (e) Reason : Financial assets of the banking system consist of all those assets (loans, foreign exchange assets)

which are which are under the control of the banks, including the central banks. (a) RBIs credit to government is considered as a financial asset, as the government is liable to

return to the RBI and also gives a nominal return. (b) Similarly is the case with the other banks credit to the government, as said above is part of the

financial asset of the banking system. (c) Credit given to the commercial sector also gives a return to the bank hence it is part of the

financial assets of the banking system. (e) Buildings are physical assets and not financial assets and are shown as other assets in the

balance sheet of the bank.

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77. Answer : (b) Reason : Revenue Deficit = Revenue expenditure Revenue Receipts Revenue Expenditure = Non-plan revenue expenditure +

plan revenue expenditure = 2,70,169 + 70313 = Rs.3,40,482 Cr Revenue Deficit = 3,40,482 (1,72,965 + 72,140) = Rs.95,377 Cr.

< TOP >

78. Answer : (b) Reason : Current account balance = Credit (Current account) debit (Current account)

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< TOP OF THE DOCUMENT >

= [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 + 15,000] [2,200 + 500 + 4,000 + 12,000] = 18,000 18,700 = 700i.e. 700 MUC (Deficit)

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0710 Eco (CFA520)[1]