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Introductory Macroeconomics – Old Question Paper 2014 | Semester: Fall

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:

ItemsAmount in Rs. Millions
Household expenditure on consumption of goods100
Investment expenditure50
Government expenditure60
Income from abroad150
Depreciation10% of GDP
Indirect taxes70
Payment to abroad30

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]
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
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

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.

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