Economics: Macroeconomics (ECOIDC-151)
FYUG Even Semester Examination, 2025
Course No: ECOIDC-151 | Full Marks: 70 | Time: 3 Hours
UNIT-I
(a) Define circular flow.
Circular flow refers to the continuous movement of money, goods, and services between different sectors of the economy (like households and firms) in a repetitive cycle.
(b) Who is regarded as the father of macroeconomics?
John Maynard Keynes is regarded as the father of macroeconomics.
(c) What do you mean by four-sector economy?
A four-sector economy includes the Household sector, Business (Firm) sector, Government sector, and the External (Rest of the World) sector.
(d) Give two examples of flow variable.
Examples include National Income and Investment (or Consumption) measured over a period of time.
- Fallacy of Composition: What is true for an individual may not be true for the whole economy.
- Heterogeneous Units: Macroeconomics aggregates different items which may not be perfectly comparable.
| Stock | Flow |
|---|---|
| Measured at a specific point in time. | Measured over a specific period of time. |
| Example: Wealth, Capital. | Example: Income, Investment. |
Distinction: Microeconomics studies individual economic units like a firm or consumer, whereas Macroeconomics studies the economy as a whole, including aggregates like total employment and national income.
Interdependence:
- Macroeconomic trends (like inflation) directly affect microeconomic decisions of households.
- Microeconomic behavior (like individual savings) aggregates to form macroeconomic variables (national savings).
- Economic policies designed at the macro level require an understanding of micro-motives to be effective.
UNIT-II
(a) Define national income.
National income is the total value of all final goods and services produced by the residents of a country in a financial year.
(b) What do you mean by the problem of double counting?
It refers to the error of counting the value of the same product more than once (as an intermediate and a final good) while calculating national income.
(c) What do you mean by net indirect tax?
Net Indirect Tax = Indirect Taxes - Subsidies.
(d) Define value added.
Value added is the difference between the value of output and the value of intermediate consumption used in the production process.
In a simple two-sector economy, we assume there are only Households and Firms.
- Factor Market: Households provide factor services (land, labor, capital) to firms and receive factor payments (rent, wages, interest).
- Product Market: Firms produce goods and services for households, and households spend their income on these products (Consumption Expenditure).
- The total flow of payments from firms to households equals the flow of spending from households to firms.
UNIT-III
This statement, known as Say's Law, was said by J.B. Say.
MV = PT
Where M = Money Supply, V = Velocity of Money, P = Price Level, and T = Volume of Transactions.
The Classical theory assumes that the economy always operates at full employment in the long run due to flexible wages and prices.
- Say's Law: Overproduction is impossible because supply generates its own demand.
- Wage-Price Flexibility: If unemployment exists, wages will fall until everyone is employed.
- Critique: Keynes criticized this during the Great Depression, arguing that wages are "sticky" downwards and that demand, not supply, determines employment levels.
UNIT-IV
Multiplier (K) = 1 / MPS
K = 1 / 0.75 = 1.33.
A liquidity trap is a situation where interest rates are so low that people prefer to hold cash rather than invest in bonds, making monetary policy ineffective.
Keynes identified three motives for holding money:
- Transactions Motive: To carry out day-to-day exchanges.
- Precautionary Motive: To meet unforeseen emergencies or contingencies.
- Speculative Motive: To hold cash in anticipation of changes in bond prices and interest rates.
UNIT-V
The Reserve Bank of India was nationalized in 1949.
OMO refers to the buying and selling of government securities by the central bank in the open market to regulate the money supply.
Quantitative Instruments:
- Bank Rate: The rate at which the central bank lends to commercial banks.
- Cash Reserve Ratio (CRR): The percentage of deposits banks must keep with the RBI.
- Statutory Liquidity Ratio (SLR): The percentage of assets banks must keep in liquid form (gold/securities).
Qualitative Instruments:
- Margin Requirements: Changing the difference between loan value and collateral value.
- Moral Suasion: Persuading banks to follow specific credit policies.