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Solved 2023: FYUG Odd Semester Exam, 2023<br>ECONOMICS (ECODSC-102T)

Subject: Economics
Paper Name: Introductory Macroeconomics
Paper Code: ECODSC-102T
Semester: 1st Semester
Year: 2023 (Held in 2024)
Full Marks: 70
Time: 3 Hours

SECTION-A

Answer ten questions, selecting two from each Unit ($2 \times 10 = 20$ Marks)

UNIT-I

2 Marks

1. Give examples of any two macroeconomic variables.

  • Gross Domestic Product (GDP): The total market value of all final goods and services produced within a country.
  • Inflation Rate: The rate at which the general level of prices for goods and services is rising.
    • 2 Marks

    2. What do you mean by 'nominal GDP' and 'real GDP'?

  • Nominal GDP: The market value of goods and services produced in an economy, unadjusted for inflation (at current prices).
  • Real GDP: The market value of goods and services produced in an economy, adjusted for inflation (at constant base-year prices).
    • 2 Marks

    3. Why is macroeconomics also known as 'theory of income and employment'?

    Macroeconomics is so-called because its primary focus is explaining the determination of the aggregate level of national income and the level of total employment in an economy.

    UNIT-II

    2 Marks

    4. Mention the primary functions of money.

  • Medium of Exchange: Facilitates the buying and selling of goods.
  • Measure of Value (Unit of Account): Provides a common standard for expressing the value of goods and services.
    • 2 Marks

    5. Mention any two determinants of money supply.

  • Monetary Base (High Powered Money): The total amount of currency in circulation plus bank reserves.
  • Money Multiplier: The ratio that indicates the maximum amount of broad money that could be created by the banking system for a given unit of base money.
    • 2 Marks

    6. What do you mean by liquidity trap?

    A Liquidity Trap is a situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective because people prefer to hold cash rather than invest in bonds.

    UNIT-III

    2 Marks

    7. Define open and suppressed inflations.

  • Open Inflation: Prices rise without any government intervention or price controls.
  • Suppressed Inflation: The government prevents price increases through controls like rationing, though the underlying pressure for inflation exists.
    • 2 Marks

    8. What do you mean by stagflation?

    Stagflation is a condition of slow economic growth (stagnation) accompanied by relatively high unemployment and rising prices (inflation).
    2 Marks

    9. Define structural unemployment.

    Structural unemployment occurs when there is a mismatch between the skills workers offer and the skills demanded by employers, often due to technological shifts.

    UNIT-IV

    2 Marks

    10. Define autonomous and induced investment.

  • Autonomous Investment: Investment that is independent of the level of income or profit (often done by the government).
  • Induced Investment: Investment that changes with the level of national income or demand.
    • 2 Marks

    11. Define effective demand.

    Effective Demand is the point where aggregate demand equals aggregate supply, representing the actual amount of goods and services purchased at a certain level of employment.
    2 Marks

    12. What is inflationary gap?

    The inflationary gap is the excess of aggregate demand over aggregate supply at the full employment level of national income.

    UNIT-V

    2 Marks

    13. What do you mean by autonomous items of BOP?

    Autonomous items are international economic transactions (like exports and imports) that take place for economic motives such as profit, independent of the state of the Balance of Payments (BOP).
    2 Marks

    14. Mention any two points of differences between BOP and BOT.

    Feature Balance of Trade (BOT) Balance of Payments (BOP) Scope Includes only visible (physical) items. Includes both visible and invisible items. Concept Narrower concept. Wider concept.
    2 Marks

    15. What do you mean by fixed exchange rate?

    A fixed exchange rate is a regime where the government or central bank ties the country's official currency value to another country's currency or the price of gold.

    SECTION-B

    Answer five questions, selecting one from each Unit ($10 \times 5 = 50$ Marks)

    UNIT-I

    2+4+4 = 10 Marks

    16. Define macroeconomics. Briefly explain the nature and scope of macroeconomics.

    Definition:
    Macroeconomics is the branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets.

    Nature of Macroeconomics:

  • Aggregate Study: It looks at totals like total consumption, total investment, and national income.
  • Interdependence: It studies how different sectors (household, business, government) interact on a large scale.

    • Scope of Macroeconomics:

  • Theory of Income and Employment: Analysis of how national income and job levels are determined.
  • Theory of General Price Level: Study of inflation and deflation.
  • Theory of Economic Growth: Focusing on long-term increases in productive capacity.
  • Macro Theory of Distribution: How total national income is shared among wages and profits.

    • UNIT-II

    10 Marks

    19. Elaborate the main functions of money. In this connection, also discuss how money has overcome the difficulties of the barter system.

    Functions of Money:

  • Primary: Medium of exchange and Measure of value.
  • Secondary: Standard of deferred payments and Store of value.
  • Contingent: Distribution of national income and basis of credit system.

    • Overcoming Barter System Difficulties:

  • Double Coincidence of Wants: Money eliminates the need for two people to want exactly what the other has.
  • Common Measure of Value: Unlike barter, money provides a single price for all goods.
  • Store of Value: Perishable goods in barter cannot be saved; money can be stored for future use.
  • Divisibility: Money allows for small transactions which were difficult with large physical goods (like livestock).

    • UNIT-III

    10 Marks

    21. Explain the role of effective demand in the Keynesian theory of income determination.

    In Keynesian economics, the level of national income and employment is determined by the level of Effective Demand.
  • Aggregate Demand Price (AD): The total amount of money that all sections of the economy are expected to spend on goods and services.
  • Aggregate Supply Price (AS): The total cost of production that must be covered to provide a certain level of employment.
  • Equilibrium: Employment is determined at the point where AD = AS. This point is called Effective Demand.
  • Key Conclusion: If effective demand is low, it leads to unemployment; to increase employment, the government must boost aggregate demand through investment.

    • UNIT-IV

    10 Marks

    23. Examine the relationship between inflation and unemployment with the help of Philips curve. Also distinguish between short-run and long-run Philips curves.

    Philips Curve Relationship:
    Developed by A.W. Phillips, it suggests an inverse relationship between the rate of unemployment and the rate of inflation. When unemployment is low, inflation tends to be high, and vice versa.

    Short-run vs. Long-run:

  • Short-run Philips Curve (SRPC): It is downward sloping, showing the trade-off between inflation and unemployment.
  • Long-run Philips Curve (LRPC): It is a vertical line at the Natural Rate of Unemployment. It suggests that in the long run, there is no trade-off, and inflation depends solely on money supply growth.

    • UNIT-V

    2+4+4 = 10 Marks

    24. Define disequilibrium in BOP. Briefly explain the causes of disequilibrium in BOP. Also suggest some remedial measures.

    Definition:
    BOP disequilibrium occurs when the total receipts from foreigners (credits) do not equal total payments to foreigners (debits) over a period.

    Causes:

  • Economic Factors: Developmental expenditure, business cycles (recession/boom), and inflation.
  • Political Factors: Political instability or changes in government policies.
  • Social Factors: Changes in tastes, preferences, or population growth.

    • Remedial Measures:

  • Export Promotion: Providing subsidies to exporters.
  • Import Substitution: Encouraging domestic production of imported goods.
  • Exchange Control: Restricting the use of foreign exchange.
  • Devaluation: Reducing the value of domestic currency to make exports cheaper and imports dearer.

    • Exam Focus Enhancements

    Important Formulas List

    • GDP Deflator: (Nominal GDP / Real GDP) x 100
    • Multiplier (K): 1 / (1 - MPC) or 1 / MPS
    • Money Supply (M1): Currency with public + Demand Deposits + Other deposits with RBI

    Common Mistakes

    • Confusing **BOT** (only goods) with **BOP** (goods, services, and transfers).
    • In the **Keynesian Multiplier**, forgetting that as MPS (Savings) increases, the multiplier value decreases.

    Answer Presentation Strategy

    For Macroeconomics, always start with a clear **Definition**. Use **Bullet Points** for functions or causes. [span_84](start_span)If a question asks for a "Critique" or "Examine," ensure you provide both the strengths and weaknesses of the theory.[span_84](end_span)

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