Institute of Chartered Financial Analysts of India (ICFAI) University 2007 Certification Finance Economics (CFA520): - Question Paper

cause : At simultaneous equilibrium,
0.5Y = 2860 – 60i (or) Y = 5720 – 120i is equal to Y = 2600 + 400i
Or, 5720 – 120i = 2600 + 400i
Or, 3120 = 520i
Or, i = 6
Thus, Y = 2600 + 400(6) = 5000
When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500,
then using LM function, 400i = 5500 – 2600 (or) i = 7.25%
Initial investment = 800 – 50(6) = 500
New investment = 800 – 50(7.25) = 437.5
change in investment = 500 – 437.5 = 62.5.
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50. ans : (a)
cause : Aggregate demand (supply) curve is a curve showing relationship ranging from the level of real domestic
output demanded (available) at every possible price level. The aggregate demand indicates the overall
demand for goods and services produced in a country. Thus, AD = C + I + G + NE. A shift in the
aggregate demand curve takes place if the any of the factor other than price levels affect the
aggregate demand. Aggregate supply, on the other hand, indicates the overall supply of goods and
services at different price levels. Any factor other than price level that affect the aggregate supply
outcomes in shift in aggregate supply curve. Increase in the factor input prices decreases the incentive for
production that lead to reduction in aggregate supply. A reduction in supply because of any other
factors other than price level is shown by a leftward shift in the aggregate supply curve. A shift in the
aggregate demand curve is caused by modifications in the consumption spending, investment spending,
government spending and net export spending. modifications in the prices of factor inputs do not affect
aggregate demand. Hence, statement (a) is accurate.
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51. ans : (b)
cause : If an economy is reviving from a recession, in the short run, there will be an increase in the demand.
This increase in demand causes an increase in price which in turn outcomes in a rise in real output.
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52. ans : (a)
cause : High powered money = monetary liabilities + government money = 10,500 + 1,500
= 12,000
Ms = H ×
48,000 = 12,000
= (1 + 0.25)/(0.25 + r) = 4
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= one + 4r = one + 0.25
4r = 0.25
r = 0.0625 = 6.25%.
53. ans : (e)
cause : High powered money = Monetary liabilities of central bank + Government money
Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary liabilities
Financial Assets = Credit to government + claims on commercial banks + credit to commercial
sectors + foreign exchange assets
= 10,080+ 3,150 + 4,950 + 1,350= 19530
Non-monetary liabilities = 900+ 3780 = 4680
Monetary liabilities of central bank = 19,530 + 450 – 4,680 = 15,300
High powered money = 15,300 + 225 = 15,525 MUC
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54. ans : (c)
cause : Stock of high powered money ( H)
= monetary liabilities of the central bank + government money = 1,250 MUC
Current deposit ratio (Cu) = 0.20
Reserve ratio (r) = 0.05
\ Money supply Ms =
=
= 4.8 × 1,250
= 6,000 MUC
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55. ans : (b)
cause : The balance sheet of Reserve Bank of India contains particulars of Bank’s current assets and
liabilities.
(a) Is not the ans because Central government’s borrowings from RBI constitutes assets of
RBI.It will affect the balance sheet.
(b) Is the ans because loan taken by 1 commercial bank from the other is a inter bank loan. It
will not affect the balance sheet of the Reserve Bank of India. It is neither a liability nor an asset
to the RBI.
(c) Is not the ans because refinancing of NABARD loans constitutes assets of RBI.
(d) Is not the ans because increase in reserves of commercial banks increases the liabilities of
RBI.
(e) Is not the ans because increase in net foreign exchange assets increases the assets of RBI.
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56. ans : (a)
cause : An important difference ranging from the approaches of the classical and Keynesian economists use to
achieve a macroeconomic equilibrium is that Keynesian economists actively promote the use of
fiscal policy; the classical economists do not. Classical economists believe intervention can be destabilizing
and advocate laissez- faire economy. Therefore the ans is (a).
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57. ans : (d)
cause : According to classical economist, aggregate supply curve is a vertical straight line. Hence it is
unrelated to the price level.
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58. ans : (b)
cause : According to Keynesian theory the term full employment refers to a situation where there is natural
Rate of unemployment.
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59. ans : (b)
cause : According to rational expectations school, discretionary monetary and fiscal policy cannot be used to
stabilize the economy. Proponents of rational expectation argue that consumers and business firms
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anticipate the implications of rise in government spending. Moneywage rate and prices will rise, but output and
employment will remain the identical. So government can no longer fool the people by increasing its
spending during elections years. So the ans is (b).
60. ans : (a)
cause : Frictional unemployment is a short-run job/skill matching issue while structural unemployment is
a long-run matching issue.
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61. ans : (c)
cause : To counter the recession the fiscal and monetary policies should be expansionary.
a. reduce in government expenditure is a contractionay fiscal policy. This measure will worsen
the recessionary situation.
b. reduce in government expenditure is a contractionay fiscal policy. This measure will worsen
the recessionary situation.
c. reduce in the discount rate increase money supply in the economy and is an expansionary
monetary policy. This will counter the recession by increasing the aggregate demand in the
economy.
d. reduce in money supply is a contractionary monetary policy. This measure will worsen the
recessionary situation.
e. Increase in the tax rate is a contractionary fiscal policy. This measure will worsen the
recessionary situation.
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62. ans : (a)
cause : Economic growth refers to situation where increased productive capabilities of an economy are made
possible by either an increasing resource base or technological advance. A country, thus, can achieve
economic growth through:
a. Improvement in technology
b. Natural resources
c. Capital
d. Human resources
change in tastes and preferences of consumers only affect the demand of an individual good or
services, and it does not increase the production capabilities of an economy.
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63. ans : (d)
cause : Slowing of economic activity accompanied by inflation is described as stagflation.
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64. ans : (a)
cause : Phillips curve in the short-run indicates an inverse relation ranging from inflation and unemployment. But in
the long run there is no trade-off because Phillips curve is vertical in the long-run.
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65. Answer: (d)
Reason: Economic growth, by definition, is stated to occur hen there is an increase in the productive capacity
of the nation, shifting the production possibility frontier to the right.
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66. ans : (a)
cause : Fiscal policy refers to policies pertaining to government spending and taxation. The overall conduct
of these policies play an important role in maintaining economic stability in the economy.
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67. ans : (b)
cause : Expansionary monetary policy effects the goods market because it lowers interest rates and raises
investment spending.
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68. ans : (a)
cause : If the government increased its spending and the Reserve Bank of India increased the money supply,
it will lead to increases in both output and the price level in the short run.
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69. ans : (c)
cause : Current account captures the transactions related to trade in goods and services, transfer payments
and factor incomes. If foreign exchange out flow on account of these is more than inflows, the
current account is in deficit.
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70. ans : (b)
cause : Because of the double entry concept underlying the recording of transactions, BoP account must
always be in balance. Thus, ‘Balance in current account + Balance in capital account + change in
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reserves = Zero’. When there is no change in the foreign exchange reserves, then ‘balance in current account +
balance in capital account = zero’ (or) balance in current account = - (balance in capital account).
a. Balance in current account + Balance in capital account = change in reserves. When balance in
current account + balance in capital account is zero, then balance in the current account =
Negative balance in capital account. Hence, statement (a) is not accurate.
b. There will be no change in the foreign exchange reserves of a country only when surplus
(deficit) in current account is equal to deficit (surplus) in capital account.
c. Current account balance may or may not be zero when the change in foreign exchange reserves
of a country is zero.
d. Trade balance (exports – imports) may or may not be zero when the change in foreign exchange
reserves of a country is zero.
e. Capital account balance may or may not be zero when the change in foreign exchange reserves
of a country is zero.
71. ans : (b)
cause : Though the outflows or inflows of capital are short term, they are still recorded in the capital
account.
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72. ans : (b)
cause : The real value of repayments in the future will fall with an increase in the inflation causing an
increase in the wealth of the debtors. With the identical reasoning the wealth of the creditors, retirees on
fixed income, employees whose salaries are linked to the CPI will reduce for an increase in the rate
of inflation.
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73. ans : (b)
cause : Expansionary fiscal policy refers to increase in government spending and reduce in taxes.
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74. ans : (d)
cause : When the budget deficit increases, there is higher expenditure undertaken by the government, which
will mean more public work projects. This will further boost employment and decrease unemployment.
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75. ans : (d)
cause : change in foreign exchange reserves = Current account balance + Capital account balance
= – 2,000 + 7,000 = 5,000 MUC. i.e. increase by 5,000 MUC.
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76. ans : (e)
cause : Financial assets of the banking system consist of all those assets (loans, foreign exchange assets)
which are which are under the control of the banks, including the central banks.
(a) RBI’s credit to government is considered as a financial asset, as the government is liable to
return to the RBI and also provide a nominal return.
(b) Similarly is the case with the other bank’s credit to the government, as stated above is part of the
financial asset of the banking system.
(c) Credit provided to the commercial sector also provide a return to the bank hence it is part of the
financial assets of the banking system.
(e) Buildings are physical assets and not financial assets and are shown as other assets in the
balance sheet of the bank.
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77. ans : (b)
cause : Revenue Deficit = Revenue expenditure – Revenue Receipts
Revenue Expenditure = Non-plan revenue expenditure +
plan revenue expenditure
= 2,70,169 + 70313
= Rs.3,40,482 Cr
\ Revenue Deficit = 3,40,482 – (1,72,965 + 72,140)
= Rs.95,377 Cr.
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78. ans : (b)
cause : Current account balance = Credit (Current account)– debit (Current account)

= [Earnings on loans and investments from abroad + Private remittances from abroad (transfers) +
Exports of services + Merchandize exports] – [Earnings on loans and investments to abroad + Private
remittances to abroad (transfers) + Import of services + Merchandize imports] = [500 + 500 + 2,000
+ 15,000] – [2,200 + 500 + 4,000 + 12,000]
= 18,000 – 18,700 = –700i.e. 700 MUC (Deficit)

Earning:   Approval pending.