All India Management Association (AIMA) 2008 M.B.A Marketing Management Business Economics II 08 - Question Paper

21.

Which of the following is a consequence of a reduction in the required reserve ratio?

<Answer>

(a)

Decrease in the credit creation and decrease in the money supply

(b)

An increase in the credit creation and decrease in the money supply

(c)

An increase in the credit creation and increase in the money supply

(d)

Decrease in credit creation and increase in the money supply

(e)

The money supply remains unaffected.

( 1

mark)

22.

Discretionary fiscal policy refers to

<Answer>

(a)

Government spending at the discretion of Parliament

(b)

Government spending at the discretion of the President

(c)

Elements of fiscal policy that routinely change in value as national income changes

(d)

Deliberate changes in government spending and taxation aimed at achieving an economic development

(e)

Changes in government spending and taxation aimed at achieving the monetary policy objectives.

( 1

mark)

23.

Inflation is the increase in the general ________ , which is sustained over a period of time.

<Answer>

(a)

Price level

(b)

Money supply

(c)

Unemployment

(d)

Investment

(e)

Production.

(1

mark)

24.

Which of the following is/are the core objectives of macroeconomic policy?

<Answer>

I.

High level of output.

n.

Full employment.

iii.

Price stability.

(a)

Only (I) above

(b)

Only (II) above

(c)

Only (III) above

(d)

Both (I) and (II) above

(e)

All (I), (II) and (III) above.

(1

mark)

25.

A countrys is a systematic record of all economic transactions between that country and the rest of the world.

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(a)

Government annual budget

(b)

Balance of trade

(c)

Balance of payments

(d)

Current account balance

(e)

Capital account balance.

(1

mark)

26.

Which of the following affects aggregate demand indirectly?

<Answer>

(a)

Investment

(b)

Net exports

(c)

Government spending

(d)

Taxes

(e)

Consumption.

(1

mark)

27.

Which of the following ensure full employment and full capacity output in the classical model?

<Answer>

(a)

Flexibility in prices and wages

(b)

Flexibility in prices and interest rate

(c)

Flexibility in prices and investment

(d)

Flexibility in prices and export

(e)

Flexibility in prices and money supply.

(1

mark)

28.

If the reserve ratio increases, the value of money multiplier will

<Answer>

(a)

Increase

(b)

Decrease

(c)

First increase then decrease

(d)

Remain constant

(e)

Become zero.

(1

mark)

29.

According to the Keynesian model,

<Answer>

(a)

Aggregate supply varies positively with exchange rate

(b)

Aggregate supply curve is upward sloping

(c)

Involuntary unemployment cannot exist

(d)

Nominal and real wages are perfectly flexible

(e)

Aggregate supply curve is vertical.

(1

mark)

30.

The

(a)

(b)

(c)

(d)

sum of the balances in the merchandise, services, investment income, and unilateral transfers is called

Capital account Current account Exports account Error and omissions

<Answer>

(e)

Official reserve account.

(1

mark)

31.

Which of the following is classified as cost-push factors of inflation?

<Answer>

(a)

Pressure of growing population

(b)

Hike in international prices of crude oil

(c)

Tax evasion by assesses

(d)

Changes in Government spending

(e)

Increase in supply of money.

(1

mark)

<Answer>

32.

If output is increasing and unemployment is decreasing, the economy must be experiencing

(a)

Contraction

(b)

Depression

(c)

Hyperinflation

(d)

Boom

(e)

Stagflation.

( 1

mark)

<Answer>

33.

Cash reserve ratio refers to

(a)

The amount of money commercial banks have to keep as reserve with the Government

(b)

Amount of money commercial banks have to keep as reserves with other commercial banks

(c)

Amount of money commercial banks have to keep as reserves with the Central bank

(d)

Amount of money the central banks have to keep as reserves with the commercial banks

(e)

Amount of deposits kept with commercial banks by the public.

( 1

mark)

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34.

Which of the following is an example of an indirect tax?

(a)

Wealth tax

(b)

Income tax

(c)

Estate duty

(d)

Excise duty

(e)

Gift tax.

(1

mark)

<Answer>

35.

Which of the following is/are tariff barrier(s) to protect domestic industries from competition?

I.

Ad valorem duties.

II.

Specific duties.

III.

Compound duties.

(a)

Only (I) above

(b)

Only (II) above

(c)

Both (I) and (III) above

(d)

Both (II) and (III) above

(e)

All (I), (II) and (III) above.

(1

mark)

<Answer>

36.

To increase the money supply, the Reserve Bank of India would

(a)

Increase the reserve requirement and the discount rate, and sell bonds

(b)

Increase the reserve requirement and the discount rate, and buy bonds

(c)

Decrease the reserve requirement and the discount rate, and sell bonds

(d)

Decrease the reserve requirement and the discount rate, and buy bonds

(e)

Keep the reserve requirement constant.

(1

mark)

<Answer>

37.

Which of the following is/are general economic indicator(s)?

I.

GDP.

II.

Inflation.

III.

Interest rates.

(a)

Only (I) above

(b)

Only (II) above

(c)

Both (I) and (II) above

(d)

Both (II) and (III) above

(e)

All (I), (II) and (III) above.

(1

mark)

<Answer>

38.

Other things remaining constant, if the anticipated rate of inflation rises, we would expect the nominal interest rate to

(a)

Remain unchanged

(b)

Decrease by the same amount as the increase in the anticipated rate of inflation

(c)

Increase, but by less than the anticipated increase in the rate of inflation

(d)

Increase by the same amount as the increase in the anticipated rate of inflation

(e)

Increase, but by more than the anticipated increase in the rate of inflation.

(1

mark)

<Answer>

39.

Which of the following is an example of expansionary fiscal policy?

(a)

A decrease in infrastructural expenditure

(b)

A purchase of government securities in the open market

(c)

A decrease in the required reserve ratio

(d)

A decrease in expenditure on education

(e)

A decrease in the corporate profit taxes.

(1

mark)

<Answer>

40.

Which of the following does not affect the balance sheet of Reserve Bank of India?

(a)

Central governments borrowings from RBI

(b)

Loan taken by one commercial bank from the other commercial bank

(c)

Refinancing of NABARD loans

(d)

Increase in reserves of commercial banks

(e)

Increase in net foreign exchange assets.

(1

mark)

<Answer>

41.

The

relationship between aggregate savings (S) and income (Y) is known as the

(a)

Consumption function

(b)

Saving function

(c)

Aggregate supply function

(d)

Aggregate demand function

(e)

Income function.

(1

mark)

<Answer>

42.

During a recession

(a)

Output and profits fall

(b)

Output and profits rise

(c)

Output rises, profits fall

(d)

Output falls, profits rise

(e)

Output and profits remain same.

(1

mark)

Particulars

MUC

Consumption

3,000

National Income

5,000

Investment

600

Government expenditure

400

Particulars

Rs. in crore

GNP at factor cost

2,10,000

Indirect Taxes

30,000

NDP at market prices

2,60,000

NNP at market prices

2,75,000

GNP at market prices

2,80,000

(a)

Rs.10,000

crore

(b)

Rs.15,000

crore

(c)

Rs.35,000

crore

(d)

Rs.50,000

crore

(e)

Rs.55,000

crore.

Particulars

Million Units of Currency (MUC)

NDP at market prices

33,878

Net factor income abroad

112

Depreciation

1,800

Subsidies

708

Indirect taxes

4,272

(a)

25 MUC

(b)

30 MUC

(c)

50 MUC

(d)

75 MUC

(e)

150 MUC.

Disposable income (Rs.)

Consumption (Rs.)

2,000

2,700

4,500

4,100

7,000

5,500

9,500

6,900

12,000

8,300

What

is the

(a)

0.15

(b)

0.20

(c)

0.40

(d)

0.44

(e)

0.75.

Finance Ratio

0.25

Intermediation Ratio

0.70

Particulars

Rs. in crore

Consumption

4,000

Investment

1,360

Government expenditure

1,120

High powered money

Rs. 5,100 cr.

Currency deposit ratio in the economy

10%

Cash reserve requirement of the central bank

6%

Particulars

MUC

Trade balance Current account balance Capital account balance

-5,000

-3,000

7,000

Particulars

MUC

Merchandise imports

25,000

Merchandise exports

18,000

Software exports

16,000

Software imports

12,000

Earnings on loans and investments abroad

400

Earnings on loans and investments in the country by foreigners

1,000

Private remittances to abroad

200

Private remittances from abroad

150

Government loans to abroad

30

Government loans from abroad

20

Direct investments abroad

10

Foreign direct investment in the country

150

Short-term loans and investments abroad

200

Foreign short-term loans and investments in the country

40

Particulars

Rs. billion

Net Bank Credit to the Government

2,000

Bank Credit to the Commercial Sector

3,000

Net Foreign Exchange Assets of the Banking Sector

2,200

Net Non-Monetary Liabilities of the Banking Sector

1,200

Government Currency Liabilities to the Public

500

Answer

Reason

1.

A

Other thing remaining constant, if there is an increase in the cost of producing output, it results in Increase in the price level and decrease in real output.

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2.

B

A forest worker who is out of work because of low demand for wood is said to be cyclically unemployed.

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3.

C

If the multiplier is 4 and the government wants to increase the level of income by Rs.30 billion, it should increase government spending by 30/4 = Rs.7.5 billion.

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4.

D

Keynesian economist favor an increase in government spending because it will result in more aggregate income than investment executed due to multiplier effect.

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5.

B

A dollar on deposit can flow back into the banking system one or more times and that dollar can expand the money supply. This is best described by the money multiplier.

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6.

C

The difference between Gross National Product and Gross Domestic Product is Net factor income from abroad.

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7.

D

GNP = GDP + NFIA

NFIA = Factor income received from abroad - Factor income paid abroad.

= 100 - 200 = - 100 GNP = 8500 - 100 = 8,400 MUC.

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8.

C

Monetarist emphasized the importance of monetary policy in bringing macroeconomic stability.

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9.

C

Bank rate is not a selective credit control method rather it is a quantitative credit control method.

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10.

E

Increase in price level, basic infrastructure and population growth are contributed to the growth of public expenditure in India.

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11.

E

Debtors gain from inflation because inflation reduces the real worth of money that they must repay in the future.

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12.

A

Credit to Government is an asset of Reserve Bank of India.

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13.

D

In the Classical Theory, saving and investment determine interest rates. Interest rate is determined at the equilibrium point of saving and investment. As the saving increases interest rate decreases and vice versa. Similarly, there is direct relationship between investment and interest rates.

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14.

B

GNP at market prices = GNP at factor cost + Indirect taxes - Subsidies = 2,40,000 + 36,000 - 14,000 = Rs. 2,62,000 Cr.

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15.

D

Non-market production refers to the value of the final product that fails to reach the market, as a result of which does not involve any

transaction.

I.    Production not reaching the market is nothing but the output that is not exchanged in the market, it is also referred to as non-market production. Hence is part of non-market production.

II.    As said in above reason given in I, wages paid in kind to maid servant are nothing but the services are bought in the market and it is a non monetary transaction. Hence it is part of market production and not non market production.

III.    Services of house wife are not produced for the market and hence are not part of market production but are part of non-market production.

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16.

A

Only Keynesians favor an active role for government in promoting low inflation and economic growth.

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17.

E

The price of Nokia cell phone. is a study of microeconomics. It is not studied in macroeconomics.

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18.

A

An increase in net taxes or a decrease in government spending which lead to decrease in aggregate output is termed as a contractionary fiscal policy.

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19.

D

A country with a deficit in its current account is a net borrower from the rest of the world.

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20.

C

Philips curve shows the trade off between inflation and unemployment. The position of the short run Philips curve depends on the expected rate of inflation. Hence, (c) is the answer.

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21.

C

When the reserve ratio is reduced, the money supply increases by the money multiplier given by M = 1 + Cu / Cu + r, where Cu : currency-reserve ratio, r : reserve-requirement ratio.

A reduction in the reserve ratio will thus tend to increase the money supply, which will enable the banks to increase the loans.

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22.

D

Discretionary fiscal policy refers to deliberate changes in government spending and taxation aimed at achieving an economic development

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23.

A

Inflation is the increase in the general price level which is sustained over a period of time.

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24.

E

High level of output, Full employment and Price stability are the core objectives of macroeconomic policy.

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25.

C

A countrys balance of payments is a systematic record of all economic transactions between that country and the rest of the world.

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26.

D

Taxes affect aggregate demand only indirectly. When there is a change in taxes, it will change the consumption, investment and government expenditures, which in turn lead to change in the aggregate demand in the economy.

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27.

A

Flexibility in prices and wages ensure full employment and full capacity output in the classical model.

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28.

B

The money multiplier is given by 1 + Cu / Cu +r when the reserve ratio goes up, the money multiplier decreases. where Cu : currency-reserve ratio, r : reserve-requirement ratio.

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29.

B

According to the Keynesian model aggregate supply curve is upward sloping.

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30.

B

The sum of the balances in the merchandise, services, investment income, and unilateral transfers accounts is called current account.

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31.

B

Option (b) is classified as cost-push factor of inflation. Options (a), (c), (d) and (e) are classified as demand-pull factors of inflation.

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32.

D

If output is increasing and unemployment is decreasing, the economy must be in a boom.

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33.

C

Cash reserve ratio refers to the amount of money commercial banks have to keep as reserves with the central banks.

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34.

D

Excise duty is an indirect tax. An indirect tax is imposed on one person but paid wholly or partly by another person.

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35.

E

Ad valorem duties, specific duties and compound duties are tariff barriers to protect domestic industries from competition.

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36.

D

To increase the money supply, the Reserve Bank of India would decrease the reserve requirement and the discount rate, and buy bonds. When the reserve requirement decreases, the banks have more money in their hands. It leads to increase in the money supply.

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37.

E

GDP, Inflation and Interest rates are general economic indicators.

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38.

D

Other things constant, if the anticipated rate of inflation rises, we would expect the nominal interest rate to rise by the same amount as the increase in the anticipated rate of inflation.

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39.

E

A decrease in the corporate profit taxes is an example of expansionary fiscal policy. When there is a decrease in corporate profit taxes, it results in an increase in the profit of business sector. Hence it leads to more expansion of the private investment.

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40.

B

The balance sheet of Reserve Bank of India contains particulars of Banks current assets and liabilities.

(a)    Is not the answer because Central government s borrowings from RBI constitutes assets of RBI. It will affect the balance sheet.

(b)    Is the answer because loan taken by one 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 answer because refinancing of NABARD loans constitutes assets of RBI.

(d)    Is not the answer because increase in reserves of commercial banks increases the liabilities of RBI.

(e)    Is not the answer because increase in net foreign exchange assets increases the assets of RBI.

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41.

B

The relationship between aggregate savings(s) and income (Y) is known as the Saving function.

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42.

A

During recessions output and profits fall.

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43.

D

Money supply (Ms) = High-powered money (H) x {(1 + Cu)/(Cu + r)} 6000 = (2000 - 500) {(1 + 0.2)/(0.2 + r)

Or, r = 10%.

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44.

E

A well-developed financial system is vital for the smooth functioning of an economy. The financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New Issues Ratio and Intermediation Ratio are indicators of financial development of a country.

(a)    Is not the answer because Finance Ratio is an indicator of financial development of a country.

(b)    Is not the answer because Financial Interrelation Ratio is an indicator of financial development of a country.

(c)    Is not the answer because New Issues Ratio is an indicator of financial development of a country.

(d)    Is not the answer because Intermediation Ratio is an indicator of financial development of a country.

(e)    Is the answer because Cost Benefit Ratio is not an indicator of financial development of a country.

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60.

E

Consumption function = 2000 + 0.80Y When C = Y

Y    - 0.80 Y = 2000

Y    = 10,000MUC.

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61.

D

If the real GDP is 5% and the inflation rate is 3%, it means that nominal GDP must be 8% Nominal GDP = real GDP + inflation is a good approximation.

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62.

A

Intermediation Ratio = Secondary issues/New issues

Or, secondary issues = Intermediation ratio x New issues = 0.7 30,000 = 21,000 MUC Total issues = New issues + Secondary issues = 30,000 + 21000 = 51,000 MUC Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF)

= 51000 / 40000 = 1.275

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63.

C

Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money = monetary liabilities of the central bank + government money.

Ms = H. m where m= Money multiplier.

Where Cu : currency-reserve ratio, r : reserve-requirement ratio.

M= 1.20 /0.25 = 4.80

When foreign exchange reserves of the country decline by Rs.300 MUC, the monetary liabilities also fall by 300 MUC. Thus, money supply decline by 4.8 x 300 =1,440 MUC.

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64.

A

Capital inflows - capital outflows = 6,800- 4,386 = 2,414 MUC (Surplus).

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65.

A

Velocity of money =

Total expenditure = C + I + G = 4000+1360+1120 = 6,480 Money supply = 6480/5= Rs1,296 cr.

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66.

C

If Yd is zero, consumption is Rs. 2,500, which is autonomous consumption. This consumption is financed by dissavings or borrowing. Hence dissavings are Rs.2,500.

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67.

A

Money multiplier = where Cu : currency-reserve ratio, r : reserve-requirement ratio.

= = 6.875

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68.

A

Change in foreign exchange reserves = Current account balance + Capital account balance = - 3000 + 7000 = 4000 MUC. So, the foreign exchange reserves of the country will increase by 4,000 MUC.

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69.

B

The purchase of government bonds is not considered investment. Because it is a transfer of ownership from one to another.

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70.

C

The growth in a country's capital stock depends on current and future savings.

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71.

A

The ultimate goal of monetary policy is to achieve economic growth with stable prices.

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72.

B

The investment multiplier explains the change in national product due to change in investment expenditure.

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73.

D

According to classical economist, aggregate supply curve is a vertical straight line. Hence it is unrelated to the price level.

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74.

D

(a)    During a boom bank reserves will be high as the bank credit is high to support the increased economic activity

(b)    Wage rate will be high as demand for labor increase during the boom phase

(c)    As the economic activity increase during the boom bank credit also increases

(d)    During a boom demand increased at a faster rate and inventories tend to be low. All other variables tend to increase during a boom.

(e)    Cost of production will be high as demand for factors of production will be relatively high during the boom phase.

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75.

D

Keeping the supply of loanable funds at the same level increase in government borrowings increase the demand for loanable funds and put upward pressure on the rate of interest.

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76.

A

Balance of Trade (BoT) = Merchandise exports - Merchandise imports = 18,000 - 25,000 = -7,000 MUC i.e. deficit of 7,000 MUC.

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77.

C

Money Supply = Net bank credit to Government + Bank credit to commercial sector + Net foreign exchange assets of the banking sector -Net non-monetary liabilities of the banking sector +Government money = 2000+3000+2200-1200+500 = Rs.6,500 billion.

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