Download economics (hons) – sem-ii

ECONOMICS (HONS) – SEM-II
INTRODUCTORY MACRO
Maximum Marks : 75
Time : 3 Hours
Instruction :
All questions are compulsory
1.
(a)
Define private saving. How is private saving used in the economy?
What is the relationship between private saving and national
saving?
6
(b)
You are given the following information about an economy:
Gross private domestic investment = 50
Government purchases of goods and services = 20
Gross national product (GNP) = 200
Current account balance = –20
Taxes = 60
Government
sector = 25
transfer
payments
to
the
domestic
private
Interest payments from the government to the domestic private
sector = 15 (Assume all interest payments by the government go to
domestic households.)
Factor income received from rest of world = 9
Factor payments made to rest of world = 7
Find the following, assuming that government investment is zero:
(a)
Consumption
(b)
Net exports
(c)
GDP
(d)
Net factor payments from abroad
(e)
Private saving
(f)
Government saving
(g)
National saving
7
(c)
“Macro economist measure income as sum of aggregate domestic
income, indirect tax and depreciation and income measured in this
way always equals output. Elaborate.
7
(d)
How does GDP differ from GNP? If a country employs many foreign
workers, which is likely to be higher: GDP or GNP?
5
Or
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(a)
An economy produces three goods: Cars, computers and oranges.
Quantities and price per unit for 2003 and 2004 are as follows:
2003
2004
Quantity
Price
Quantity
Price
Cars
10
$2,000
12
$3,000
Computers
4
$1,000
6
$500
Oranges
1000
$1
1000
$1
(b)
(c)
(i)
What is nominal GDP in 2003 and 2004? By what
percentage does nominal GDP change from 2003 to 2004?
(ii)
Using the prices for 2003 as the set of common prices, what
is real GDP in 2003 and in 2004? By what percentage does
real GDP change from 2003 to 2004?
(iii)
Using the prices for 2004 as the set of common prices, what
is real GDP in 2003 and in 2004? By what percentage does
real GDP change from 2003 to 2004?
6
The nation of Economica had a current account deficit of $2 billion
and a nonreserve financial account surplus of $1 billion in 2008.
(i)
What was the balance of payments of Economica in that
year? What happened to the country’s net foreign assets?
(ii)
Assume that foreign central banks neither buy nor sell
Economica assets. How did the Economican central bank’s
foreign reserves change in 2008? How would these official
purchases enter foreign balance of payments accounts?
(iii)
How would your answer to (b) change if you learned that
foreign central banks had purchased $1.2 billion of
Economican assets in 2008? How would these official
purchases enter foreign balance of payments accounts?
6
After a boat rescues everyone else from Gilligan’s Island, the
Professor and Gilligan remain behind, afraid of getting
shipwrecked again with the same bunch of people. The Professor
grows coconuts and catches fish. Last year he harvested 1000
coconuts and caught 500 fish. He values one fish as worth tow
coconuts. The Professor gave 200 coconuts to Gilligan in exchange
for help in the harvest, and he gave Gilligan 100 fish in exchange
for collecting worms for use in fishing. The Professor stored 100 of
his coconuts in his hut for consumption at some future time.
Gilligan consumed all his coconuts and fish.
In terms of fish, what is the GDP of Gilligan’s Island? What are
consumption and investment? What are the incomes of the
Professor and Gilligan?
7
(d)
What is national wealth, and why is it important? How is national
wealth linked to national saving?
6
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2.
(a)
Assume that money demand takes the following form:
 

M
 Y 1  r  πe
P
Where Y = 1000 and x = 0.1.
(1)
Assume that, in the short run, π e is constant and equal to
25%. Calculate the amount of seignorage if the rate of
money growth, M/M , equals:
(i)
25%
(ii)
50%
(iii)
75%
5
(b)
Explain the roles of monetary and fiscal policy in causing and
ending hyperinflations.
7
(c)
Derive money multiplier. How does it depend on c(currency-money
ratio) and θ (reserve-deposit ratio)
7
(d)
How would each of the following change the Tanzi-Olivera effect?
(i)
Requiring monthly instead of yearly tax payments by
households.
(ii)
Assessing greater penalties for under withholding of taxes
from monthly paychecks.
(iii)
Decreasing the income tax, and increasing the sales tax.
6
Or
(a)
What is hyper-inflation. How it is caused? Suggest measures to
control it.
6
(b)
What are social cost of inflation. Explain.
(c)
Suppose that a person’s wealth is $50000 and that her yearly
income is $60000. Also suppose that her money demand function
is given by
6
Md  $Y.35  i 
(d)
(i)
Derive the demand for bonds. Suppose the interest rate
increases by 10 percentage points. What is the effect on the
demand for bonds?
(ii)
What are the effects of an increase in wealth on money and
on bond demand? Explain in words.
(iii)
What are the effects of an increase in income on money and
on bond demand? Explain in words.
6
Explain relation between deficit, seigniorage and inflation. Why it
is difficult for government to maintain constant money growth? 7
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3.
(a)
C = 50 + 0.8(Y – T)
T = 100
I = 150 – 5i
G = 100
L = 0.2Y – 10i
M = 200
P =2
Calculate
(b)
(i)
Equilibrium income & interest rate.
(ii)
If government expenditure increases to 150, find new
equilibrium income & crowing out effect.
(iii)
If full employment income is Rs. 1200, calculate change in
nominal money supply required to achieve fill employment.
6
Consider a modified IS-LM system where:
C  C  cY - T 
I  I  br  eY 
GG
 M/P  kY  hr
Assume that all the sensitivity coefficients (c, b, e, k and h) are
greater than 0.
Solve for the equilibrium levels of output, interest rate and
investment [assume that [(c + e) < 1]
6
(c)
Explain how the interest rate works in the classical system
stabilize aggregate demand in the face of autonomous changes
components of aggregate demand such as investment
government spending.
to
in
or
6
(d)
Suppose that the public’s taste changes in such a way that leisure
comes to be more desirable relative to commodities. How would
you expect such a change to affect output, employment, and the
real wage in the classical model?
7
Or
(a)
In a closed economy, let us define policy effectiveness as an
increase in output due to policy interventions. Use IS-LM diagrams
to answer the following:
(i)
is fiscal policy effective when the interest elasticity of
investment is tending to infinity?
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(b)
(c)
(d)
(ii)
is fiscal policy effective when the interest elasticity of money
demand is tending to infinity?
(iii)
is a price fall effective if the economy is in the liquidity trap?
6
Suppose that the money supply, instead of being constant,
increased (slightly) with the interest rate.
(i)
How would this change affect the construction of the LM
curve?
(ii)
Could you see any reason why the Fed might follow a policy
of increasing the money supply along with the interest rate?
6
(i)
Explain in words how and why the multiplier α G and the
interest sensitivity of aggregate demand affect the slope of
the IS curve.
(ii)
Explain why the slope of the IS curve is a factor in
determining the working of monetary policy.
6
Within the classical model, analyze the effects of an increase in the
marginal income tax rate. Explain how output, employment, and
the price level are affected.
7
All the Best
*****
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