Solved 2025: ECODSC-252: Intermediate Macroeconomics FYUG Even Semester Exam, 2025

1. Answer any two of the following questions: 2 x 2 = 4

(a) Write any two factors determining the slopes of IS-LM curves.

IS Curve: The interest sensitivity of investment and the size of the multiplier.

LM Curve: The interest elasticity of money demand and the income elasticity of money demand.

(b) Mention two components of aggregate demand curve.

Consumption expenditure (C).

Investment expenditure (I).

(c) State two assumptions about the price level that allows for an upward sloping short-run aggregate supply curve.

Sticky-wage model: Nominal wages are slow to adjust in the short run.

Sticky-price model: Some prices are slow to adjust due to menu costs or long-term contracts.

2. (a) Show graphically how equilibrium level of national income is determined in the AD-AS model. 10

In the AD-AS model, the equilibrium level of national income and price level is determined at the intersection of the Aggregate Demand (AD) and Aggregate Supply (AS) curves.

Aggregate Demand (AD): Represents the total spending on domestic goods at different price levels.

Aggregate Supply (AS): Represents the total production of goods at different price levels.

Equilibrium: Point where AD = AS. If price is above equilibrium, there is a surplus; if below, there is a shortage.

UNIT-II

3. Answer any two of the following questions: 2 x 2 = 4

(a) What happens to consumption when income increases according to Keynes?

As income increases, consumption also increases, but by a smaller amount (MPC < 1).

(b) Write two assumptions of the permanent income hypothesis.

Consumers seek to smooth consumption over their lifetime.

Consumption is proportional to permanent income, not current income.

(c) Mention two criticisms of Modigliani's life cycle hypothesis.

It assumes perfect foresight regarding future income and lifespan.

It ignores the impact of liquidity constraints and bequest motives.

4. (a) Compare and contrast the absolute income hypothesis with permanent income hypothesis. 10

Feature Absolute Income Hypothesis (Keynes) Permanent Income Hypothesis (Friedman) Primary Factor Current Disposable Income Permanent/Expected Income MPC Decreases as income rises Remains stable Focus Short-run consumption Long-run consumption smoothing

4. (b) Critically examine the psychological law of consumption as proposed by Keynes. 10

The Law: Keynes stated that men are disposed to increase their consumption as their income increases, but not by as much as the increase in their income.

Critical Examination:

Assumptions: Constant institutional and psychological factors, and a normal environment.

Implications: Leads to a declining APC and necessitates investment to fill the gap between income and consumption.

Criticism: It is a short-run observation; in the long run, APC tends to remain constant (Kuznets' findings).

UNIT-III

5. Answer any two of the following questions: 2 x 2 = 4

(a) State two objectives of monetary policy.

Price stability (controlling inflation).

Full employment/Economic growth.

(b) Write two instruments of fiscal policy.

Government Spending (G).

Taxation (T).

(c) Name any two key targets of monetary policy.

Interest rates.

Money supply (M1/M2).

6. (a) Explain how crowding out affects the government spending multiplier and overall economic growth. 10

Crowding out occurs when expansionary fiscal policy (increased G) raises interest rates, which subsequently reduces private investment.

Multiplier Effect: The standard multiplier is reduced because the increase in income leads to higher money demand, raising r, and lowering I.

Economic Growth: In the long run, if public spending replaces private investment, it may hinder capital accumulation and productive capacity.

UNIT-IV

7. Answer any two of the following questions: 2 x 2 = 4

(a) State the relationship among MPC, MPS and multiplier.

MPC + MPS = 1; Multiplier (K) = 1 / MPS = 1 / (1 - MPC)

(b) Name four main phases of business cycle.

Expansion (Recovery)

Peak (Boom)

Contraction (Recession)

Trough (Depression)

(c) What are the main policies used to control business cycle?

Monetary Policy (Bank rates, open market operations).

Fiscal Policy (Deficit/Surplus budgeting).

8. (b) How does the interaction between the multiplier and the accelerator create cyclical fluctuations in Hicks-Samuelson model? 10

The model explains business cycles as a result of the Super-Multiplier.

Multiplier: Increases in investment lead to higher income and consumption.

Accelerator: Increased consumption leads to a derived demand for more capital goods (induced investment).

Fluctuations: This interaction creates an upward spiral until ceilings are reached, and a downward spiral until floors are hit.

UNIT-V

9. Answer any two of the following questions: 2 x 2 = 4

(a) How does exchange rate policy affect the IS-LM model in an open economy?

Under fixed rates, the money supply must adjust to maintain the rate; under flexible rates, the exchange rate adjusts to clear the Balance of Payments (BOP).

(b) Mention two factors that affect the position and slope of the BOP curve in an open economy.

The degree of capital mobility.

The sensitivity of exports and imports to income and exchange rates.

10. (b) Discuss the Mundell-Fleming model in modern macroeconomic analysis along with some criticisms. 10

The Mundell-Fleming model extends the IS-LM model to an open economy by adding the BP (Balance of Payments) curve.

Policy Effectiveness: Monetary policy is highly effective under flexible exchange rates, while fiscal policy is effective under fixed exchange rates.

Criticisms: It assumes static expectations and ignores the complexities of international capital markets and long-run adjustments.

Exam Focus Enhancements

Exam Tips: In Macroeconomics, always label your axes (Y for Income, r or P for Interest/Price).

Common Mistakes: Mixing up the Multiplier (K = 1/MPS) with the Accelerator. [span_82](start_span)Remember the Multiplier starts with Investment, Accelerator starts with Consumption.[span_82](end_span)

Important Formulas:

K = 1 / (1 - MPC)

IS: Y = C + I + G

Fundamental Equation of Monetary Approach to BOP: R = MD - D

Answer Strategy: For 10-mark questions, use the "Introduction - Points - Diagram - Conclusion" format.