Introductory Macroeconomics
Old Question Paper 2014 | Semester: Fall
Exam 2014 Fall
1. a. Why is macroeconomics called a policy science? Explain the main issues that are focused in macroeconomics study. [7]
b. Show the circular flow of income and expenditure in an open economy. [8]
2. a. Define real GDP. How do you differentiate between GDP at factor cost and GDP at market price? [8]
b. Calculate national and personal income from the following information:
| Items | Amount in Rs. Millions |
| Household expenditure on consumption of goods | 100 |
| Investment expenditure | 50 |
| Government expenditure | 60 |
| Income from abroad | 150 |
| Depreciation | 10% of GDP |
| Indirect taxes | 70 |
| Subsidies | 10 |
| Payment to abroad | 30 |
| Import | 10 |
| Export | 80 |
3. a. Explain the summary model of the classical theory of output and employment with appropriate diagrams. [8]
b. Explain the effective demand theory of the determination of employment. [7]
4. a. Define marginal propensity to consume. Illustrate the basic premises of the psychological law of consumption. [8]
OR
Explain the process of determining the equilibrium rate of interest under the Liquidity Preference Theory of Interest.
b. Illustrate and explain what happens in general equilibrium under the IS-LM framework: [7]
i. If government expenditure increases but demand for and supply of money remain constant
ii. If the money supply increases but investment and saving remain the same.
5. Suppose a model is given as follows:
C=100 +0.75Yd;(where Yd = disposable income)
I= 250 million, G= 100 million and T= 100 million
Find
a. Equilibrium level of income and saving. [5]
b. Change in equilibrium income if G increases to 200 and I decreases to 150 million. [5]
c. Balance budget multiplier. [5]
6. a. Consider a two sector model with following equations. [8]
C=20 +0.5Y, I=200-2000i,
Mt =0.5Y, Msp = 105-1500i
Find
i. IS and LM functions
ii. Equilibrium income and interest
b. Define monetary policy. Explain the objectives of monetary policy in developing countries. [7]
7. Write short notes on any two: [2×5=10]
a. Marginal efficiency of capital
b. Philip’s curve
c. Phases of the business cycle.