Economics: Macroeconomics (ECOIDC-151)
FYUG Even Semester Examination, 2025
Course No: ECOIDC-151 | Full Marks: 70 | Time: 3 Hours
UNIT-I
1. Short Answer Questions 1 x 4 = 4
(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.
2. (a) Mention any two limitations of macroeconomics. 2
- 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.
2. (b) Distinguish between stock and flow. 2
| Stock |
Flow |
| Measured at a specific point in time. |
Measured over a specific period of time. |
| Example: Wealth, Capital. |
Example: Income, Investment. |
3. (b) Distinguish between microeconomics and macroeconomics. Also elaborate the interdependence between them. 3 + 5 = 8
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
4. Short Answer Questions 1 x 4 = 4
(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.
6. (b) Discuss the circular flow of income in a two-sector economy. 8
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
7. (b) "Supply creates its own demand." Who said this? 1
This statement, known as Say's Law, was said by J.B. Say.
7. (d) Write down the Fisher's equation of exchange. 1
MV = PT
Where M = Money Supply, V = Velocity of Money, P = Price Level, and T = Volume of Transactions.
9. (a) Critically discuss the classical theory of full employment. 8
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
10. (e) If MPS = 0.75, find the value of multiplier. 1
Multiplier (K) = 1 / MPS
K = 1 / 0.75 = 1.33.
11. (a) Define liquidity trap. 2
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.
12. (a) Briefly explain the Keynesian theory of demand for money. 8
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
13. (d) When was the RBI nationalized? 1
The Reserve Bank of India was nationalized in 1949.
13. (e) Define Open Market Operations (OMO). 1
OMO refers to the buying and selling of government securities by the central bank in the open market to regulate the money supply.
15. (a) Briefly explain the various instruments of monetary policy. 8
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.