Macroeconomics Solved Question Paper 2022 | BCom 2nd Sem Dibrugarh University

Dibrugarh University B.Com 2nd Sem Macro Economics Question Paper 2022 
COMMERCE 
(Generic Elective)
Paper: GE-202 (Macroeconomics)
Full Marks: 80
Pass Marks: 32

Time: 3 hours

The figures in the margin indicate full marks for the questions

1. Answer the following as directed:        1x8=8

(a) State any subject matter of macroeconomics.

Ans:  Growth theory is the subject matter of Macroeconomics.

(b) Write the meaning of effective demand.

Ans: Effective demand refers to the amount of goods and services that consumers are willing and able to buy at a given price level, taking into account their income and the level of interest rates.

(c) What do you understand by recognition lag?

Ans: Recognition lag refers to the delay between the occurrence of an economic event and the time it is recognized by policymakers. For example, it may take some time for policymakers to recognize a recession and implement appropriate policies to address it.

(d) “Inflation is a monetary phenomenon.” Who said?

Ans: The economist Milton Friedman famously said that "inflation is always and everywhere a monetary phenomenon."

(e) GNPMP = ______ = GDPMP (Fill in the blank)

Ans: GNPMP = GDPMP + Net factor income from abroad.

(f) Mention any one method of anti-inflationary fiscal measure.

Ans:One method of anti-inflationary fiscal measure is to reduce government spending or increase taxes to reduce aggregate demand and inflationary pressures.

(g) In an open economy, Y = C + I + G + ______. (Fill in the blank)

Ans:  In an open economy, Y = C + I + G + NX, where NX represents net exports (exports minus imports).

(h) Write the definition of cash reserve ratio (CRR).

Ans: Cash reserve ratio (CRR) refers to the percentage of deposits that banks are required to hold with the central bank as a reserve. It is a tool used by the central bank to regulate the money supply and control inflation.

2. Write short notes on any three of the following (within 150 words each):           4x3=12

(a) Static macroeconomic analysis.

Ans:Static macroeconomic analysis refers to the study of the behavior of the economy at a given point in time. It involves the analysis of various macroeconomic variables, such as output, prices, employment, and interest rates. The purpose of static analysis is to understand the current state of the economy and to identify the factors that influence economic growth and stability.

(b) Role of monetary policy.

Ans: The role of monetary policy is to manage the money supply and interest rates in order to achieve certain macroeconomic objectives, such as controlling inflation, promoting economic growth, and stabilizing the economy. Central banks use various tools, such as open market operations, discount rates, and reserve requirements, to influence the level of economic activity.

(c) Effects of inflation.

Ans: Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. The effects of inflation include a decrease in the purchasing power of money, an increase in the cost of living, and a decline in the standard of living.

(d) Exchange rate.

Ans: Exchange rate refers to the value of one currency in terms of another currency. The exchange rate has important implications for international trade, capital flows, and economic growth.

(e) Demand for real balances.

Ans:The demand for real balances refers to the demand for money in an economy. This demand is influenced by various factors, such as the level of economic activity, the level of interest rates, and the rate of inflation.

(f) Open economy versus closed economy.

Ans: An open economy refers to an economy that engages in international trade and investment. In contrast, a closed economy refers to an economy that does not engage in international trade or investment. Open economies are more susceptible to external shocks, such as changes in exchange rates and international capital flows, while closed economies are more insulated from such shocks.

3. Write about the components of aggregate expenditure. Discuss the long-run equilibrium using aggregate demand and aggregate supply.    6+6=12

Ans: Aggregate expenditure is the total amount of spending on goods and services in an economy. It is composed of four main components: consumption, investment, government spending, and net exports.

1. Consumption: This is the spending by households on goods and services. It is the largest component of aggregate expenditure in most economies.

2. Investment: This includes spending by businesses on capital goods such as machinery and equipment, as well as spending on new construction. It also includes inventory investment, which is the change in the level of inventories held by businesses.

3. Government spending: This includes spending by all levels of government on goods and services such as defense, education, and infrastructure.

4. Net exports: This is the difference between exports and imports. When a country exports more than it imports, it has a trade surplus, which adds to aggregate expenditure. When a country imports more than it exports, it has a trade deficit, which subtracts from aggregate expenditure.

In the long run, the economy is in equilibrium when the aggregate demand (AD) for goods and services is equal to the aggregate supply (AS) of goods and services. The AD curve represents the total amount of goods and services that households, businesses, and governments are willing to buy at different price levels, while the AS curve represents the total amount of goods and services that firms are willing and able to produce at different price levels.

In the long run, the AS curve is vertical because it is determined by the availability of resources and technology, which do not change in response to changes in prices. Therefore, in the long run, changes in the price level only affect the level of nominal wages and prices, but not the real output or employment.

The long-run equilibrium occurs at the intersection of the AD and AS curves. At this point, the economy is producing at its potential output level, and there is no tendency for inflation or recession. However, shifts in the AD and AS curves can cause short-run fluctuations in the economy.

For example, an increase in government spending can shift the AD curve to the right, leading to an increase in both the price level and output in the short run. However, in the long run, the increase in output will be limited by the availability of resources and technology, and the economy will return to its potential output level. Similarly, a negative shock to productivity can shift the AS curve to the left, causing a decrease in both output and the price level in the short run, but the economy will eventually adjust back to its potential output level.

Or

What are the IS and LM curves? How are these curves derived? Write about the factors that cause shift in the IS and LM curves. 4+4+4=12

Ans: The IS and LM curves are graphical representations of the equilibrium condition in the goods and money markets, respectively, in the IS-LM model of macroeconomic analysis.

The IS curve shows the combinations of interest rates and output levels where the goods market is in equilibrium, that is, where the demand for goods equals the supply of goods. The LM curve shows the combinations of interest rates and output levels where the money market is in equilibrium, that is, where the demand for money equals the supply of money.

The IS curve is derived from the Keynesian cross model, which shows that the equilibrium level of output is determined by the intersection of aggregate demand and aggregate supply. The aggregate demand curve is derived by adding consumption, investment, government spending, and net exports. The aggregate supply curve is assumed to be upward sloping in the short run, implying that firms are willing to supply more output at higher prices.

The LM curve is derived from the money market model, which shows that the equilibrium interest rate is determined by the intersection of the money demand and money supply. The money demand curve is derived from the quantity theory of money, which states that the demand for money is a function of the price level and the level of transactions. The money supply curve is determined by the central bank.

There are several factors that can cause shifts in the IS and LM curves. A shift in the IS curve can be caused by changes in autonomous spending, such as changes in investment, government spending, or net exports. A shift in the LM curve can be caused by changes in the money supply or money demand, such as changes in the price level or changes in the public's preference for holding money.

Other factors that can affect the IS and LM curves include changes in taxes, changes in technology, changes in inflation expectations, and changes in the exchange rate. These factors can cause shifts in the curves, leading to changes in the equilibrium interest rate and output level.

In conclusion, the IS and LM curves are graphical representations of the equilibrium conditions in the goods and money markets, respectively, in the IS-LM model. The curves are derived from the Keynesian cross model and the money market model, respectively. The factors that cause shifts in the IS and LM curves include changes in autonomous spending, money supply, money demand, taxes, technology, inflation expectations, and the exchange rate.

4. Discuss about the Keynesian view regarding the effectiveness of monetary and fiscal policy. Point out your views in favor of expansionary fiscal policy.         8+4=12

Ans: According to Keynesian economics, monetary and fiscal policy can be effective in managing the economy during periods of recession or high unemployment. The Keynesian view is that when the economy is operating below its potential, there is insufficient demand in the economy, leading to unemployment and underutilization of resources. In such a situation, monetary policy may not be effective in stimulating economic activity because interest rates are already low, and there may be a liquidity trap in which people hoard money instead of spending it.

In contrast, fiscal policy can be effective in stimulating economic activity by increasing government spending and/or cutting taxes. This increases the demand for goods and services, leading to increased economic activity and employment. The Keynesian view is that during periods of recession, the government should use expansionary fiscal policy to increase aggregate demand and get the economy back on track.

I am in favor of expansionary fiscal policy during periods of recession or high unemployment. In such situations, monetary policy may not be sufficient to stimulate the economy, and fiscal policy can be used to provide a boost to demand. By increasing government spending or cutting taxes, the government can create jobs and stimulate economic activity, which can lead to higher tax revenues in the future. However, it is important to ensure that any fiscal stimulus is targeted, efficient, and sustainable in the long run, to avoid increasing public debt to unsustainable levels. 

Or

Define monetary and fiscal policy. Write about the instruments of monetary control of a country.               6+6=12

Ans: Monetary policy refers to the actions taken by a central bank, such as the Federal Reserve in the US or the European Central Bank in the Eurozone, to manage the money supply and interest rates in order to achieve macroeconomic goals such as price stability, full employment, and economic growth. Fiscal policy, on the other hand, refers to the use of government spending, taxation, and borrowing to achieve similar macroeconomic goals.

The instruments of monetary control vary from country to country, but generally include the following:

1. Open market operations: This involves the buying and selling of government securities by the central bank to increase or decrease the money supply. If the central bank buys government securities, it injects money into the economy, increasing the money supply. If it sells securities, it takes money out of the economy, decreasing the money supply.

2. Discount rate: The discount rate is the interest rate at which commercial banks can borrow money from the central bank. By increasing or decreasing the discount rate, the central bank can influence the cost of borrowing for commercial banks and, in turn, affect the amount of lending and borrowing in the economy.

3. Reserve requirements: Commercial banks are required to hold a certain percentage of their deposits as reserves with the central bank. By increasing or decreasing reserve requirements, the central bank can influence the amount of money that banks have available to lend, thereby affecting the money supply.

4. Interest on reserves: Central banks can pay interest on the reserves that commercial banks hold with them. By increasing or decreasing the interest rate paid on reserves, the central bank can influence the amount of money that banks choose to hold as reserves, thereby affecting the money supply.

5. Forward guidance: This involves communicating the central bank's future monetary policy intentions to the public in order to influence expectations and behavior. For example, if the central bank signals that it will keep interest rates low for an extended period of time, it may encourage borrowing and investment, thereby stimulating the economy.

In conclusion, monetary policy is the use of central bank actions to manage the money supply and interest rates to achieve macroeconomic goals, while fiscal policy involves government spending, taxation, and borrowing. The instruments of monetary control include open market operations, discount rate, reserve requirements, interest on reserves, and forward guidance. These tools are used to influence the money supply and interest rates, and thereby impact the overall health of the economy.

5. Define inflation. Point out two main causes of inflation. Explain different measures used for controlling inflation. 3+4+5=12

Ans: Inflation is a sustained increase in the general level of prices of goods and services in an economy over a period of time. In other words, it is a decrease in the purchasing power of money.

There are two main causes of inflation:

1.Demand-pull inflation: This type of inflation occurs when aggregate demand in an economy exceeds the available supply of goods and services. When demand exceeds supply, prices tend to rise as businesses try to increase their profits by charging more for their products.

2.Cost-push inflation: This type of inflation occurs when the costs of production increase, such as wages, raw materials, or taxes. When production costs increase, businesses raise the prices of their products to maintain their profit margins.

There are several measures that can be used to control inflation:

1.Monetary policy: The central bank of a country can use monetary policy tools, such as changing interest rates or the money supply, to control inflation. Increasing interest rates, for example, can reduce aggregate demand and slow down inflation.

2.Fiscal policy: Governments can use fiscal policy tools, such as changing taxes or government spending, to control inflation. Increasing taxes or reducing government spending can reduce aggregate demand and slow down inflation.

3.Price controls: Governments can impose price controls, such as setting a maximum price for a product, to control inflation. However, this measure can lead to shortages and reduce the quality of goods and services.

4.Wage controls: Governments can also impose wage controls, such as setting a maximum wage increase, to control inflation. However, this measure can lead to labor unrest and reduce productivity.

5.Exchange rate policy: Governments can use exchange rate policy, such as devaluing their currency, to control inflation. A devalued currency makes exports cheaper and imports more expensive, which can reduce demand for imports and slow down inflation.

In conclusion, inflation is a sustained increase in the general level of prices of goods and services, caused by demand-pull or cost-push factors. Various measures, such as monetary policy, fiscal policy, price controls, wage controls, and exchange rate policy, can be used to control inflation.

Or

Explain the trade-off between inflation and unemployment with the help of Phillips’ curve. Elaborate how expected inflation causes a shift in the short-run Phillips’ curve.     6+6=12

Ans: The Phillips curve is a graphical representation of the relationship between inflation and unemployment. It shows that there is a trade-off between these two variables in the short run, but this trade-off may not hold in the long run.

According to the Phillips curve, in the short run, when unemployment is low, there tends to be upward pressure on wages, which leads to higher inflation. Conversely, when unemployment is high, there tends to be downward pressure on wages, which leads to lower inflation. This relationship between inflation and unemployment is known as the short-run Phillips curve.

However, in the long run, the Phillips curve becomes vertical, indicating that there is no trade-off between inflation and unemployment. This is because in the long run, wages and prices are flexible, and any increase in aggregate demand due to lower unemployment will eventually be absorbed by higher prices, resulting in no change in the unemployment rate.

Expected inflation can cause a shift in the short-run Phillips curve. When people expect inflation to increase, they will demand higher wages to compensate for the expected loss in purchasing power. This increase in wages will shift the short-run Phillips curve upwards, leading to higher inflation at any given level of unemployment. Similarly, when people expect inflation to decrease, they will be willing to accept lower wages, which will shift the Phillips curve downwards, leading to lower inflation at any given level of unemployment.

In summary, the Phillips curve shows the trade-off between inflation and unemployment in the short run. However, this trade-off may not hold in the long run, and the Phillips curve can shift based on expectations of inflation. Understanding the relationship between inflation and unemployment is important for policymakers to make informed decisions about monetary policy and economic growth.

6. Define open economy. Discuss the impact of foreign trade on national income of an open economy.    4+8=12

Ans: An open economy refers to an economy that engages in international trade and has a significant degree of economic interaction with other countries. In an open economy, goods, services, and capital flow freely across international borders, and the economy is influenced by global market conditions.

The impact of foreign trade on national income of an open economy can be significant. When an open economy engages in foreign trade, it can affect its national income in several ways:

1. Export earnings: If an open economy is able to export its goods and services to other countries, it can increase its national income by earning foreign exchange. This foreign exchange can then be used to import goods and services that the country needs.

2. Import expenditures: On the other hand, if an open economy imports more goods and services than it exports, it will need to pay for these imports by using its foreign exchange reserves or borrowing from other countries. This can lead to a decrease in national income if the country is unable to earn enough foreign exchange through exports.

3. Changes in exchange rates: Fluctuations in exchange rates can also impact the national income of an open economy. If the value of the country's currency appreciates, its exports become more expensive and may decrease, while imports become cheaper, potentially increasing import expenditure. Conversely, if the value of the country's currency depreciates, its exports become cheaper and may increase, while imports become more expensive, potentially decreasing import expenditure.

4. Competitive pressures: The presence of foreign competitors can also impact the national income of an open economy. If foreign firms are able to produce goods and services at a lower cost than domestic firms, it may lead to a decrease in national income for domestic firms.

Overall, foreign trade can have a significant impact on the national income of an open economy. By managing its trade policies and exchange rates, an open economy can work to maximize its export earnings and minimize its import expenditures, helping to support economic growth and development.

Or

Distinguish between fixed and flexible exchange rate systems. Discuss the causes of fluctuations in the exchange rate. 6+6=12

Ans: Fixed and flexible exchange rate systems are two different methods of determining the exchange rate between two currencies:

Fixed exchange rate system: In a fixed exchange rate system, the exchange rate between two currencies is set by the government or central bank and remains constant. The government or central bank will buy or sell its own currency to maintain the fixed exchange rate. For example, if the government sets the exchange rate of one US dollar to one Euro, it will intervene in the foreign exchange market by buying or selling its own currency to maintain this fixed rate.

Flexible exchange rate system:In a flexible exchange rate system, the exchange rate is determined by supply and demand in the foreign exchange market. The exchange rate can fluctuate freely, based on market forces, without government or central bank intervention. In this system, the government or central bank may still intervene in the foreign exchange market to stabilize the exchange rate, but it does not attempt to maintain a fixed rate.

Fluctuations in the exchange rate can be caused by several factors, including:

1. Changes in economic indicators: Economic indicators such as inflation, GDP, and employment can affect the value of a currency and cause fluctuations in the exchange rate.
2. Changes in interest rates: Interest rates can impact the demand for a currency, as higher interest rates can make a currency more attractive to investors, leading to an increase in its value.
3. Political instability: Political instability in a country can cause uncertainty and lead to a decrease in the value of its currency.
4. Speculation: Speculators can cause fluctuations in the exchange rate by betting on the future value of a currency.
5. International trade: Fluctuations in the exchange rate can also be caused by changes in the balance of trade between two countries.

Overall, fluctuations in the exchange rate can have a significant impact on international trade, investment, and economic growth. By understanding the causes of these fluctuations, governments and businesses can make informed decisions to manage risk and take advantage of opportunities in the global marketplace.

Dibrugarh University Macroeconomics Solved Question Paper 2022 

7. Define private investment and write about different determinants of it. Suggest the measures to stimulate private investment. 6+6=12

Ans: Private investment refers to the amount of funds that private businesses and individuals invest in capital goods such as machinery, equipment, buildings, and other long-term assets. Private investment is a crucial component of economic growth, as it helps to increase productivity, create jobs, and drive innovation.

There are several determinants of private investment, including:

1. Interest rates: Low interest rates can encourage businesses and individuals to borrow money to invest in capital goods, while high interest rates can discourage borrowing and investment.
2. Economic growth: Strong economic growth can increase the demand for goods and services, which can encourage businesses to invest in capital goods to meet the growing demand.
3. Technological advancements: Advances in technology can make it more cost-effective for businesses to invest in new capital goods, which can increase investment.
4. Business confidence: When businesses are optimistic about the future, they are more likely to invest in capital goods. Conversely, when businesses are uncertain about the future, they may be hesitant to invest.
5. Government policies: Government policies such as tax incentives, subsidies, and regulations can influence private investment.

To stimulate private investment, governments can take several measures, including:

1. Lowering interest rates: Lowering interest rates can make it cheaper for businesses to borrow money to invest in capital goods.
2. Providing tax incentives: Governments can offer tax incentives to encourage businesses to invest in capital goods.
3. Investing in infrastructure: Governments can invest in infrastructure such as roads, bridges, and public transportation, which can make it easier and more cost-effective for businesses to invest in capital goods.
4. Supporting research and development: Governments can support research and development in areas such as technology and renewable energy, which can lead to new opportunities for private investment.
5. Reducing regulatory burden: Governments can reduce the regulatory burden on businesses, which can free up resources for investment in capital goods.

Overall, stimulating private investment is critical for promoting economic growth and creating jobs. By creating a favorable environment for private investment, governments can help to drive innovation and increase productivity, which can lead to long-term economic prosperity.

Or

Give the definitions of demand for and supply of money. Explain the Keynesian theory of interest with the help of demand for and supply of money. 4+8=12

Ans: Demand for money refers to the amount of cash or liquid assets that individuals, businesses, and governments want to hold for transactions or speculative purposes. The demand for money is influenced by factors such as income levels, interest rates, inflation expectations, and the availability of credit.

Supply of money refers to the total amount of money in circulation in an economy, including cash and bank deposits. The supply of money is controlled by central banks through monetary policy, such as setting interest rates and regulating the money supply.

The Keynesian theory of interest asserts that the interest rate is determined by the intersection of the demand for and supply of money. According to Keynes, the demand for money is influenced by the level of income and the interest rate, while the supply of money is controlled by the central bank.

When the demand for money increases, the interest rate also rises because individuals and businesses are willing to pay more for the limited supply of money available. Conversely, when the demand for money decreases, the interest rate falls, as individuals and businesses are less willing to pay high interest rates for money that they do not need.

Keynes also argued that the central bank can influence the interest rate by changing the supply of money. For example, if the central bank increases the money supply, it can lower interest rates and stimulate economic activity. Alternatively, if the central bank reduces the money supply, it can raise interest rates and control inflation.

Overall, the Keynesian theory of interest emphasizes the importance of monetary policy in managing the economy and promoting stable economic growth. By controlling the supply of money, central banks can influence the interest rate and stimulate or slow down economic activity as needed.

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