Macro Economics-2

SECTION A

Discuss the nature and development of macroeconomic theory

Explain the concept of equilibrium and discuss its importance in economic theory

What do you understand by national income? Is national incomea true indicator of a country's economic prosperity?

Explain the aggregate demand function and discuss its role in the determination of the level of employment

Explain the theory of income and employment

Explain the concept of foreign trade multiplier with suitable examples

Discuss the long-run and the short-run nature of the income-consumption relationship

 

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8    Although saving is a virtue for the individual but for the community it is a vice. Discuss fully.

SECTION B

Case study
The classical economists believed that aggregate demand would always be sufficient to absorb the full capacity output Qo. In other words, they denied the possibility of underspending or overproduction. This belief has its root in Say’s Law. (a) Say’s Law: According to Say’s Law supply creates its own demand, i.e., the very act of producing goods and services generates an amount of income equal to the value of the goods produced. Say’s Law can be easily understood under barter system where people produced (supply) goods to demand other equivalent goods. So, demand must be the same as supply. Say’s Law is equally applicable in a modern economy. The circular flow of income model suggests this sort of relationship. For instance, the income created from producing goods would be just sufficient to demand the goods produced. (b) Saving-Investment Equality: There is a serious omission in Say’s Law. If the recipients of income in this simple model save a portion of their income, consumption expenditure will fall short of total output and supply would no longer create its own demand. Consequently there would be unsold goods, falling prices, reduction of production, unemployment and falling incomes. However, the classical economists ruled out this possibility because they believed that whatever is saved by households will be invested by firms. That is, investment would occur to fill any consumption gap caused by savings leakage. Thus, Say’s Law will hold and the level of national income and employment will remain unaffected. (c) Saving-Investment Equality in the Money Market: The classical economists also argued that capitalism contained a very special market – the money market – which would ensure saving investment equality and thus would guarantee full employment. According to them the rate of interest was determined by the demand for and supply of capital. The demand for capital is investment and its supply is saving. The equilibrium rate of interest is determined by the saving-investment equality. Any imbalance between saving and investment would be corrected by the rate of interest. If saving exceeds investment, the rate of interest will fall. This will stimulate investment and the process will continue until the equality is restored. The converse is also true. (d) Price Flexibility: The classical economists further believed that even if the rate of interest fails to equate saving and investment, any resulting decline in total spending would be neutralized by proportionate decline in the price level. That is, Rs 100 will buy two shirts at Rs 50, but Rs 50 will also buy two shirts if the price falls to Rs 25. Therefore, if households saves more than firms would invest, the resulting fall in spending would not lead to decline in real output, real income and the level of employment provided product prices also fall in the same proportion. (e) Wage Flexibility: The classical economists also believed that a decline in product demand would lead to a fall in the demand for labour resulting in unemployment. However, the wage rate would also fall and competition among unemployed workers would force them to accept lower wages rather than remain unemployed. The process will continue until the wage rate falls enough to clear the labour market. So a new lower equilibrium wage rate will be established. Thus, involuntary unemployment was logical impossibility in the classical model.
Answer Section

Q.No 1: Examine critically the classicaly theory of income and employment

Q.No 2: Can there be unemployment in a classical macroeconomic model.

SECTION C

Who is credited with brining the term "the invisible hand" in economics?
 (A): Adam Smith
 (B): John Maynard Keynes
 (C): F. Hayek
 (D): Samuelson

Who is called as the 'founding father of modern economics'?
 (A): Adam Smith
 (B): John Maynard Keynes
 (C): F. Hayek
 (D): Samuelson

Macroeconomics as a separate branch came to be studied after the contributions of which economist?
 (A): Adam Smith
 (B): John Maynard Keynes
 (C): F. Hayek
 (D): Samuelson

When did the Great Depression hit the United States?
 (A): 2007
 (B): 1929
 (C): 1936
 (D): 2001

Consider the following statements: (1) In a Capitalist economy there is private ownership of means of production (2) In a communist nation, the means of production are owned by the State (3) In a free-market economy there is minimum role of the Government  Which of the above 3 statement is/are true?
 (A): Only 1 and 3
 (B): Only 2 and 3
 (C): Only 3
 (D): All are true

Macroeconomics is a study of economics that deals with which 4 major factors:
 (A): households, firms, government, and demand-supply
 (B): households, firms, government and external sector
 (C): firms, government, free-market, and regulations
 (D): none of the above

What are consumption goods?
 (A): Goods used for consumption in the production process
 (B): Goods such as tools, machinery, etc which are used to create final consumption goods
 (C): Goods and services that are consumed fully when purchased by the consumer
 (D): None of the above

What are Capital goods?
 (A): Goods used for consumption in the production process
 (B): Goods such as tools, machinery, etc which are used to create final consumer goods
 (C): Goods and services that are consumed fully when purchased by the consumers
 (D): None of the above

Intermediate goods are not included to calculate the final output because:
 (A): they do not have value
 (B): they have unknown value
 (C): their value is included in final goods so they are not added to avoid the problem of double counting
 (D): none of the above

What does the term Gross investment mean while denoting a nation's economy?
 (A): Gross investment= Net investment + Depreciation
 (B): Gross investment= Net investment - Depreciation
 (C): Gross investment= Depreciation - Net investment
 (D): None of the above

What does the term free-market denote in terms of economy?
 (A): Minimal government intervention in trade and minimum regulations
 (B): Maximum government intervention in trade and maximum regulations
 (C): Means of production owned by the state
 (D): None of the above

What is the term in economics for the consumption of fixed capital?
 (A): Investment
 (B): Value added
 (C): Production flow
 (D): Depreciation

The difference between the Gross value added and Net value added is:
 (A): Investment
 (B): Value added
 (C): Production flow
 (D): Depreciation

What is the sum total of gross value added of all the firms in the country?
 (A): Gross Domestic Product
 (B): Gross National Product
 (C): Net Domestic Product
 (D): Net National product

What is the sum total of gross value added of all the firms in the country minus the depreciation?
 (A): Gross Domestic Product
 (B): Gross National Product
 (C): Net Domestic Product
 (D): Net National product

What is the sum total of gross value added of all the firms in the country added with the net factor income from abroad?
 (A): Gross Domestic Product
 (B): Gross National Product
 (C): Net Domestic Product
 (D): Net National product

What is the Gross National Product minus the depreciation?
 (A): Gross Domestic Product
 (B): Gross National Product
 (C): Net Domestic Product
 (D): Net National product

In terms of economics, what is an "externality"?
 (A): Benefits or harm caused by a firm without payment/penalty
 (B): Net income from foreign countries
 (C): Total exports by a country in a given year
 (D): None of the above

What is the correct formula for GDP Deflater?
 (A): Nominal GDP - (minus) Real GDP
 (B): Nominal GDP + Real GDP
 (C): Nominal GDP/ Real GDP
 (D): Real GDP/ Nominal GDP

Friedrich Hayek was a proponent of :
 (A): Keynesian economics
 (B): Communism
 (C): Classical Liberalism
 (D): Socialism

Which of the following is a central issue in macroeconomics?
 (A): the deregulation of the banking industry
 (B): inflation of prescription drug prices
 (C): the effect of excise taxes on consumers' buying patterns
 (D): none of the above

Which of the following is NOT an issue in macroeconomics?
 (A): issues relating to the balance of payment
 (B): the determination of prices in the agricultural sector
 (C): the relationship between inflation and unemployment
 (D): the possible effect of budget deficit increases on the level of investment
In studying growth theory
 (A): we focus on the very long run
 (B): we ignore recessions and booms
 (C): we assume that all inputs are fully employed
 (D): all of the above

In the very long run
 (A): the position of the AD-curve depends on the productive capacity of the economy
 (B): the position of the AS-curve depends on the degree of consumer confidence
 (C): the position of the AS-curve essentially determines the level of output
 (D): the position of the AD-curve is affected by changes in efficiency improvements

The position of the long-run AS-curve is determined by
 (A): the full-employment level of output
 (B): consumer confidence
 (C): fiscal policy
 (D): monetary policy

In the very long run,
 (A): the AS-curve is vertical
 (B): the AS-curve is horizontal
 (C): the AS-curve is upward sloping
 (D): the level of output is solely determined by the position of the AD-curve

Which of the following is NOT true in the very short run?
 (A): a shift in the AD-curve will change output but not prices
 (B): a shift in the AD-curve will change prices but not output
 (C): the AS-curve is horizontal
 (D): the position of the AD-curve can be influenced by fiscal policy

In the very short run
 (A): the position of the AD-curve determines the level of output
 (B): the position of the AD-curve cannot be changed by fiscal or monetary policy
 (C): a change in monetary policy will affect both the price level and the level of output
 (D): a change in fiscal policy will not change the level of output

In the very short run
 (A): the level of prices can change quite rapidly, but the level of output is fixed
 (B): the level of prices is unaffected by the level of output
 (C): the level of prices and the level of output change with a shift in aggregate demand
 (D): the level of prices and the level of output are both fixed

In the medium run, restrictive fiscal policy will cause
 (A): a decrease in the level of output but no change in the level of prices
 (B): a decrease in the level of prices but no change in the level of output
 (C): a decrease in both the level of prices and the level of output
 (D): a decrease in real GDP with no change in nominal GDP

In the medium run, monetary policy can be used to
 (A): shift the AD-curve, but this will only result in a price change, not in a change in real GDP
 (B): affect nominal GDP, but this will not have any effect on real GDP
 (C): lower the price level while increasing the level of real GDP
 (D): lower the price level but only at the cost of also lowering the level of real GDP

Periods of very high inflation rates
 (A): can only occur in a situation when the AS-curve is vertical
 (B): most often are caused by sharp increases in aggregate demand
 (C): can only occur if the output gap is large
 (D): most often occur when actual GDP is less than potential GDP
Potential GDP is
 (A): always greater than actual GDP
 (B): the level of GDP if unemployment is zero
 (C): equal to nominal GDP adjusted for inflation
 (D): none of the above

Which of the following does NOT affect the trend path of GDP over time?
 (A): efficiency improvements
 (B): an increase in population growth
 (C): fluctuations in the unemployment rate
 (D): the availability of capital equipment

The output gap is defined as
 (A): nominal GDP minus real GDP
 (B): potential GDP minus actual GDP
 (C): nominal GDP adjusted for inflation
 (D): actual output minus the output that could be produced if the capital stock remained constant
One of the main controversies in macroeconomics is
 (A): whether the AS-curve is really flat in the very short run
 (B): whether the AD-curve can be shifted by fiscal or monetary policy
 (C): how steep the medium run AS-curve really is
 (D): whether the level of output can be changed by an increase in the efficiency of the factors of production

If we compare the trend path of GDP with the behavior of actual GDP in the U.S. over the last four decades, we realize that
 (A): actual GDP never went above potential GDP
 (B): the output gap was never more than 5 percent of GDP
 (C): the output gap never was negative
 (D): none of the above

If we look at the growth of real GDP per capita around the world from 1913-98, we see that
 (A): the U.S. had the highest growth rate among industrial nations
 (B): the U.S. growth rate was about twice as high as that of the United Kingdom
 (C): the U.S. growth rate was only about half of Japan's
 (D): Japan was the only country with a growth rate higher than the U.S.

Increases in the rate of inflation
 (A): generally are inversely related to the output gap
 (B): are more pronounced in periods of recession
 (C): always coincide with a decrease in the unemployment rate
 (D): generally do not occur in periods of high growth in money supply

Question
If we look at the behavior of the U.S. CPI over the last four decades we realize that inflation
 (A): never exceeded 10 percent
 (B): steadily increased in the 1970s
 (C): was, on average, lower in the 1990s than in the 1960s
 (D): was at its highest in the early 1980s