Question Paper

Economics (MB141): January 2006

Answer all questions.
Marks are indicated against each question.

1.

< Answer >

Which of the following circumstances refers to a mixed economy?

(a)
(b)
(c)
(d)
(e)

Free market economy

Government plays the pivotal role in the functioning of the economy
Prices are automatically fixed only by the market forces
Government exercises its power only in the important sectors while in the other sectors a free
market economy exists
Prices are only fixed by the farmers.
(1 mark)

2.

< Answer >

A good is said to be luxury, when the value of income elasticity of demand is

(a) Greater than one
(d) Less than one but more than zero

(b) Equal to one

(e) Infinity.

(c) Zero
(1 mark)

3.

< Answer >

Which of the following is true of a straight-line demand curve?

(a)
(b)
(c)
(d)
(e)

Elasticity is equal to zero at the midpoint

As we move down along the curve, the elasticity falls
As we move down along the curve, the elasticity rises, and then falls
As we move down along the curve, the elasticity rises
The elasticity remains unchanged throughout the curve.
(1 mark)

4.

When a decrease in price leads to increase in quantity purchased so much as to increase the total < Answer >
revenue, the price elasticity of demand is
(a) Less than unity
(d) Zero

(b) Equal to unity

(e) Infinity.

(c) More than unity

(1 mark)

5.

Let the market demand for a food product be P = 200 Qd. Calculate the point price elasticity of < Answer >
demand when the price of the food product is Rs.75 per kg.
(a) 0.600

(b) 0.606

(c) 0.660

(d) 0.616

(e) 0.661.
(2 marks)

6.

< Answer >

The demand and supply functions of a good are as follows:

Demand function
: P = 104 4Q
Supply function
: P = 2 + 0.5Q
Where P = price of the good and Q = quantity of goods
If the price of the good is Rs.20, the surplus/shortage of goods in the market is
(a) 15 units (surplus)
(c) 20 units (surplus)
(e) 12 units (surplus).

(b) 15 units (shortage)

(d) 20 units (shortage)
(2 marks)

7.

Demand and supply functions of cigarettes are given by the following functions:
QD = 5,800 80P
QS = 1,000 + 40P
If the government imposes a tax of Rs.12 on each unit to discourage smoking, what would be the new
equilibrium price?
1

< Answer >

(a) Rs.40.0

(b) Rs.44.0

(c) Rs.48.0

(d) Rs.52.0

(e) Rs.42.5.
(2 marks)

8.

< Answer >

The demand function for Rollex pens is estimated as

QR = 10,000 1,500PR + 2Y + 200PC
Where,
QR = Quantity of Rollex pens demanded
PR = Price of Rollex pen
PC = Price of Competitors product
Y = Per capita income of the consumer
If the current price of Rollex pen is Rs.5, the price of the competitors product is Rs.8 and per capita
income is Rs.5,000, the income elasticity of demand is
(a) 0.521
(b) 1.222
(c) 0.827
(d) 0.709
(e) 1.052.
(2 marks)

9.

< Answer >

Which of the following statements is true?

(a)

A consumer experiencing diminishing marginal utility from consumption of a good should stop
further consumption of that good
(b) Tastes and preferences will ultimately determine how much of a good a consumer will buy
(c) When both supply and demand increase, equilibrium price will always increase
(d) When income increases, demand for all goods will increase
(e) Price and quantity demanded is inversely related for normal goods.
(1 mark)
< Answer >

10. A consumers demand curve can be obtained from

(a) Income-consumption curve
(c) Price-consumption curve

(b) Indifference curve

(d) Iso-cost curve

(e) Isoquant.
(1 mark)

11. Management of a company has finally agreed to increase the salaries of the staff by 10% after hard < Answer >
negotiations with the labor union. Which of the following would not be affected by this decision?
(a) Economic costs
(c) Direct costs

(b) Accounting profit

(d) Implicit costs

(e) Fixed costs.

(1 mark)

12. If the marginal utilities of A and B are 1,050 utils and 1,575 utils, and the price of B is Rs.60, what < Answer >
would be the price of A, given that the consumer is at equilibrium?
(a) Rs.15

(b) Rs.30

(c) Rs.40

(d) Rs.35

(e) Rs.25.
(1 mark)
< Answer >

13. The utility function of a consumer is estimated to be

TU = 100 + 0.25Y2
If the price of the good Y is Rs.10, how many units of good Y the consumer would be willing to
consume?
(a) 25 units

(b) 20 units

(c) 30 units

(d) 40 units

(e) 45 units.
(2 marks)

14. The intersection of marginal product curve and average product curve characterizes the point of
(a) Maximum profit
(c) Maximum average product
(e) Zero marginal product.

< Answer >

(b) Maximum total product

(d) Maximum marginal product
(1 mark)

15. Which of the following represents the marginal rate of technical substitution (MRTS)?
(a) Slope of the isocost curve
(c) Slope of the isoquant
(e) Slope of the average cost curve.

(b) Slope of the indifference curve

(d) Slope of the budget line
2

< Answer >

(1 mark)
16. Production function for a firm is TPL = 20L L2. The number of labor units after which marginal < Answer >
production becomes negative is
(a) 4

(b) 6

(c) 5

(d) 10

(e) 8.
(2 marks)
< Answer >

17. MRTSL,K for the production function, Q = 10K0.5L0.5 is

(a) 0.5 K/L

(b) 0.5 L/K

(c) K/L

(d) L/K

(e) 0.5+K/L.
(2 marks)

18. A firm is experiencing increasing returns to scale. If both labor and capital inputs of the firm increase < Answer >
by 10%, the output increases by
(a) 7%

(b) 8%

(c) 9%

(d) 10%

(e) 22%.
(1 mark)

19. Total cost function for a firm is TC = 20Q 0.25Q2 + 0.01Q3. What is the output at which marginal < Answer >
cost is minimum?
(a) 6 units

(b) 7 units

(c) 8 units

(d) 9 units

(e) 10 units.
(2 marks)

20. The difference between the total utility derived from the consumption of a good and the amount of < Answer >
money actually paid for it is called
(a) Marginal utility
(c) Consumer surplus

(b) Average utility

(d) Producer surplus (e) Opportunity cost.
(1 mark)

21. Mr. Sachin can earn money from various activities. His hourly earnings from cricket is Rs.5,000, acting < Answer >
Rs.30,000, coaching Rs.10,000 and ceremonies Rs.15,000. The opportunity cost of an hour of coaching
for Sachin is
(a)

Rs.5,000
(e) Rs.40,000.

(b) Rs.10,000

(c) Rs.15,000

(d) Rs.30,000
(1 mark)
< Answer >

22. The following is the marginal cost schedule for a good:

Output
1
2
3
4
5

Marginal Cost
6
5
4
5
7

If the firm produces four units of output, the average cost of production would be
(a) Rs.6

(b) Rs.5

(c) Rs.4

(d) Rs.7

(e) Rs.10.
(1 mark)

23. The total cost function of Marico Ltd. is TC = 300Q - 10Q2 + Q3. The average cost of the firm, if the < Answer >
output is 10 units is
(a) Rs.120

(b) Rs.140

(c) Rs.160

(d) Rs.300

(e) Rs.200.
(1 mark)
< Answer >

24. Which of the following is an example of fixed cost?

(a) Payments for raw materials
(c) Transportation charges
(e) Depreciation of the factory.

(b) Labor costs

(d) Insurance premiums on property
(1 mark)
3

< Answer >

25. Which of the following cost curves is not U shaped?

(a) Long run average cost curve
(c) Short run average cost curve
(e) Average fixed cost curve.

(b) Long run marginal cost curve

(d) Average variable cost curve
(1 mark)
< Answer >

26. A firm realizes least-cost in production, if it substitutes the factors until their
(a)
(b)
(c)
(d)
(e)

Prices are equal

Marginal physical products are equal
Marginal physical products are equal to their factor prices
Marginal physical products are equal to zero
Marginal physical product to the factor price ratio is equal for all factor inputs.
(1 mark)
< Answer >

27. Refer to the diagram below:

According to this equilibrium position, the firm

(a) Makes neither profit nor loss
(c) Incurs loss
(e) Shuts down its operation.

(b) Makes normal profit

(d) Makes more than the normal profits
(1 mark)
< Answer >

28. If a perfectly competitive firm finds itself operating at loss in the short run, it will
(a)
(b)
(c)
(d)
(e)

Reduce the size of its plant to lower fixed costs

Raise the price of its product
Shut down
Continue to operate as long as it covers variable cost
Continue to operate as long as it covers its fixed cost.
(1 mark)
< Answer >

29. In a perfectly competitive market, the marginal revenue curve

(a) Slopes downward
(d) Is horizontal

(b) Slopes upward

(e) Is absent.

(c) Is vertical
(1 mark)
< Answer >

30. Which of the following is not true with respect to a perfectly competitive market?
(a)
(b)
(c)
(d)
(e)

There are many sellers in the market

Individual firms are price makers
Products sold by the firms are identical
Anyone can enter or exit the industry without difficulty in long run
Buyers and sellers have perfect information about the market.
(1 mark)

31. If a producer sells 29 units of a good for Rs.290, the average revenue that can be earned by the < Answer >
producer will be
(a) Rs.290.00

(b) Rs.100.00

(c) Rs.29.00
4

(d) Rs.10.00

(e) Re.0.10.

(1 mark)
32. The cost function of Alco & Co. is TC = 2,850 + 3.5Q. If the current market price of the good produced < Answer >
by the firm is 5 per unit, what will be the break-even output for the firm?
(a) 1,600 units

(b) 1,200 units

(c) 1,550 units

(d) 1,900 units

(e) 1,750 units.

(2 marks)

33. Ralcorp Ltd. is operating in a perfectly competitive market. The Average Variable Cost function of < Answer >
Ralcorp is
AVC = 300 40Q + 2Q2
The firm has an obligation to pay Rs.500 towards lease rental irrespective of the output produced. What
is the price below which the firm has to shut-down its operation in the short run?
(a) Rs.300

(b) Rs.100

(c) Rs.225

(d) Rs.210

(e) Rs.150.
(2 marks)
< Answer >

34. The supply curve of a monopolist

(a)
(b)
(c)
(d)
(e)

Is the portion of MC curve that lies above the AVC curve

Is the portion of MC curve that lies above the AC curve
Is vertical
Is horizontal
Is absent.
(1 mark)
< Answer >

35. Which of the following is not the characteristic feature of a monopoly?

(a) Single buyer
(c) Absence of close substitutes for the product
(e) Marginal revenue is less than average revenue.

(b) Single producer

(d) Entry barriers for the new firms
(1 mark)

36. Which of the following is not a predominant feature of an oligopolistic market?

< Answer >

(a) Group behaviour

(b) Few firms supply entire market
(c) Interdependence of firms
(d) Free entry and exit of firms
(e) Some firms have a large share and can influence the price.
(1 mark)
< Answer >

37. From kinked demand curve one can infer that

(a)
(b)
(c)
(d)
(e)

Oligopoly prices remain stable

Oligopoly lead to monopoly in the short run
Oligopolies lead to perfect competition in the long run
Oligopolies lead to monopoly in the long run
There is quantity rigidity.
(1 mark)

38. Alfa Mangoes Co. which supplies mangoes to England and Australia faces the following total cost < Answer >
function.
C = 300 + 10Q
Where Q = number of units of mangoes supplied.
The demand functions for mangoes in England and Australia are estimated as
England : PE = 52 3QE
Australia : PA = 120 10QA
If the monopolist practices price discrimination, the difference in price charged in England and
Australia would be
(a) Rs.20

(b) Rs.34

(c) Rs.75

(d) Rs.10

(e) Rs.85.
(2 marks)

39. A monopoly firm has the total cost function as TC = 500 + 20Q2. The demand equation is < Answer >
P = 400 20Q. The profit maximizing output for the firm is
(a) 10 units

(b) 8 units

(c) 6 units

(d) 5 units

(e) 4 units.
(2 marks)
< Answer >

40. Which of the following variables is a flow variable?

(a) Capital stock
(c) Gross fixed investment

(b) A firms assets

(d) Price index

(e) Public debt.

(1 mark)
< Answer >

41. The value-added approach to GDP measurement

(a)
(b)
(c)
(d)
(e)

Adds up the difference between the value of output and costs of intermediate goods
Adds up all income received by the household sector in the economy
Removes the effect of inflation from the nominal GDP
Adds up all the expenditures incurred on the goods and services produced by the domestic sector
Adds the total money value of goods and services purchased by their ultimate buyers.
(1 mark)
< Answer >

42. The net factor income earned within the domestic territory of a country must be equal to
(a)
(c)
(e)

Net Domestic Product at factor cost

Net National Product at factor cost
Personal income.

(b) Net Domestic Product at market price

(d) Net National Product at market price
(1 mark)
< Answer >

43. Which of the following statements is not true?

(a)
(b)
(c)
(d)
(e)

GDP deflator is also known as implicit price deflator

GDP deflator reflects the change in overall price level of the economy
GDP deflator is the most comprehensive index of prices
GDP deflator reflects on the purchasing power of the people
GDP deflator measures economic growth.
(1 mark)
< Answer >

44. The circular flow diagram shows

I.
Households providing firms with factors of production.
II. Income for factors of production flowing from households to firms.
III. Firms owning factors of production.
(a) Only (I) above
(c) Both (I) and (III) above
(e) (I), (II) and (III) above.

(b) Only (III) above

(d) Both (II) and (III) above
(1 mark)
< Answer >

45. The difference between personal disposable income and personal income is
(a) Residential investment
(d) Transfer payments

(b) Indirect taxes

(e) Personal taxes.

(c) Subsidies
(1 mark)

46. The following information is given from the national accounts of a country for the year 2005-06.
Particulars
Factor income earned within domestic territory
Gross domestic fixed capital formation
Net domestic fixed capital formation
GNP at market prices
Indirect taxes
Subsidies
6

Million Units
of Currency
(MUC)
13,000
1,200
700
17,000
600
200

< Answer >

The net factor income from abroad for the year 2005-06 is
(a) 3,000 MUC
MUC.

(b) 3,100 MUC

(c) 3,200 MUC

(d) 3,400 MUC

(e) 2,200
(2 marks)
< Answer >

47. The following data is taken from National Income Accounts of a country:
Particulars
GNP at market prices
Transfer payments

Rs. Cr.
8,500
1,210

Indirect taxes

865

Personal taxes

1,015

Consumption of capital

950

Undistributed corporate profits

140

Corporate tax

375

Subsidies

100

National income in the country is

(a) Rs.6,815 cr

(b) Rs.5,605 cr

(c) Rs.6,150 cr

(d) Rs.6,685 cr

(e) Rs.6,785 cr.

(2 marks)
< Answer >

48. The following is the information from national accounts of an economy:

Particulars
Direct taxes
Indirect taxes
Factor income paid abroad
Factor income received from abroad
Depreciation
Subsidies
National income
The GDP at market prices is
(a) 24,800 MUC
(b) 30,200 MUC
(c) 68,400 MUC

MUC
2,400
11,400
12,000
9,000
12,000
6,000
48,000
(d) 52,350 MUC (e) 45,600 MUC.
(2 marks)
< Answer >

49. Consumption demand does not depend upon the level of

(a) Income
(c) Propensity to save
(e) Marginal efficiency of investment.

(b) Propensity to consume

(d) Wealth
(1 mark)
< Answer >

50. The following information relates to an economy:

Particulars
National income
Wages & Salaries
Interest income
Rental income

:
:
:

MUC
3,000
1,800
450
400

The profit in the economy is

(a) 150 MUC

(b) 250 MUC

(c) 350 MUC

(d) 450 MUC

(e) 550 MUC.

(1 mark)
< Answer >

51. The slope of the consumption curve connotes

(a) Average propensity to save
(c) Marginal propensity to consume
(e) Level of consumption in the economy.

(b) Average propensity to consume

(d) Marginal propensity to save
(1 mark)
7

52. If the Average Propensity to Save (APS) is negative, then the Average Propensity to Consume (APC) is < Answer >
(a) Negative
(d) One

(b) Zero
(c) Positive but less than one
(e) Greater than one.
(1 mark)
< Answer >

53. Monetary policy will be more effective when

(a)
(b)
(c)
(d)
(e)

The economy is facing recession

The private investment is more sensitive to interest rate
The private investment is less sensitive to interest rate
The economy is suffering from liquidity trap
The economy is in boom.
(1 mark)

54. Suppose that people hold 25% of their money in currency. If the reserve ratio is 12% and total demand < Answer >
for money is Rs.10,000, then the amount required by banks to meet the reserve requirement is equal to
(a) Rs.900

(b) Rs.2,750

(c) Rs.3,000

(d) Rs.4,500

(e) Rs. 7,500.

(2 marks)
< Answer >

55. Stagflation is a period of

I.
II.
III.
IV.

High inflation.
High growth of real GDP.
High unemployment.
High aggregate demand.

(a) Both (I) and (III) above

(c) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.

(b) Both (III) and (IV) above

(d) (II), (III) and (IV) above
(1 mark)
< Answer >

56. Which of the following is not a cause for growing fiscal deficit of the Union Government?
(a) Subsidies
(c) Reduction in revenue expenditure
(e) Defense expenditure.

(b) Interest payments

(d) Employee salaries/pensions
(1 mark)
< Answer >

57. Bank rate is

(a)
(b)
(c)
(d)
(e)

The rate at which Central Bank discounts the government bills

The rate at which Central Bank discounts the eligible bills of commercial banks
The rate at which Commercial banks give loans to other commercial banks
The rate at which Commercial banks lend to the public
The rate at which Central Bank discounts the foreign bills.
(1 mark)
< Answer >

58. Which of the following is not advocated by supply-side economics?

(a) Promote competition
(c) Increase corporate tax rate
(e) Remove institutional barriers.

(b) Reduce government controls

(d) Decrease excise duty
(1 mark)

59. Which of the following is/are not considered in the calculation of national income?
I.
II.
III.
IV.
(a)
(c)
(e)

Teaching in a class.
Shirt stitched by a father for his son.
Patient attended to by a doctor.
Services of a housewife.
Both (I) and (II) above
Both (II) and (IV) above
All (I), (II), (III) and (IV) above.

(b) Both (I) and (IV) above

(d) Both (II) and (III) above

< Answer >

(1 mark)
< Answer >

60. The Phillips curve shows the short-run trade-off between

(a) Inflation and unemployment
(c) Inflation and the nominal interest rate
(d) Nominal interest rate and investment

(b) Unemployment and output

(e) Inflation and output.
(1 mark)

61. When there is an unanticipated inflation, which of the following sections of an economy benefit?
(a) Borrowers
(d) Lenders

(b) Fixed income earners

(e) Speculators.

< Answer >

(c) Holders of currency

(1 mark)
< Answer >

62. An expansionary monetary policy includes measure such as

(a) Increase in Bank rate
(c) Reduction in cash reserve ratio
(e) Devaluation of the currency.

(b) Increase in cash reserve ratio

(d) Selling government securities in open market
(1 mark)
< Answer >

63. Which of the following is not an example of Automatic Stabilizers?

(a) National defense spending
(c) Unemployment compensation
(e) Corporate income tax.

(b) Social welfare payments

(d) Personal income tax
(1 mark)

64. Consumption function for an economy is estimated to be C = 400+0.75Yd, where C and Yd are < Answer >
measured in Rs. cr. The level of consumption at which the savings will be zero is
(a) Rs.1,400 cr

(b) Rs.1,500 cr

(c) Rs.1,600 cr

(d) Rs.1,700 cr (e) Rs.1,300 cr.

(1 mark )
< Answer >

65. Which of the following is true if the RBI decreases cash reserve ratio (CRR)?
(a)
(b)
(c)
(d)
(e)

Monetary liabilities of the RBI decreases

High-powered money in the economy increases
The value of money multiplier increases
Aggregate demand in the economy decreases
Price level in the economy falls.
(1 mark)
< Answer >

66. Which of the following policy instruments has the least outside lag?
(a) Cash reserve ratio
(d) Taxes

(b) Bank rate

(c) Repo rate
(e) Open market operations.
(1 mark)
< Answer >

67. Which of the following is a liability for a commercial bank?

(a) Reserves with the RBI
(c) Credit to the Central Government
(e) Discounted commercial bills.

(b) Loans to Public Sector Undertakings

(d) Deposits from the public
(1 mark)
< Answer >

68. Immediately following a depression,

(a)
(b)
(c)
(d)
(e)

Unemployment rate increases moderately

Aggregate demand decreases further because of recession
There will be rapid increase in wages but less than the increase in prices of goods and services
The cost of production will gradually increase because of gradual increase in wages
Output will decrease rapidly.
(1 mark)

< Answer >

69. Phases of business cycles in an economy are designated primarily based on the
(a) Unemployment rate
(d) Inventory levels

(b) Price levels

(c) Real GDP
(e) Gross investment.
(1 mark)
< Answer >

70. The overall Balance of Payments of a country for the year 2005-06 is given below.
(Rs. million)
Items
Credit
Debit
Merchandise
159,000
196,422
Services
74,958
56,340
Transfers
45,675
1,101
Income
8,478
23,124
Foreign Direct Investment
14,370
3,537
Portfolio Investment
22,605
19,773
External Assistance
8,319
15,699
Commercial Borrowings (MT & LT)
8,211
13,305
Commercial Borrowings (Short Term)
24,567
21,630
Commercial Banks
50,778
16,919
Others
1,608
738
Rupee Debt Service

1,422
Other Capital
19,206
8,727
Errors & Omissions
1,902

During the year 2005-06, overall Balance of Payments position for the country is
(a) Rs.60,940 million (surplus)
(b) Rs.60,940 million (deficit)
(c) Rs.50,940 million (surplus)
(d) Rs.50,940 million (deficit)
(e) Rs.52,740 million (surplus).
(2 marks)

< Answer >

71. The following information relates to an economy.

Particulars

Rs. in crore

Consumption

1,000

Investment

340

Government expenditure

280

If the velocity of money is 4, money supply in the economy is

(a) Rs. 162.50 crore
(b) Rs. 245.00 crore
(d) Rs. 405.00 crore
(e) Rs. 487.50 crore.

(c) Rs. 262.50 crore

(2 marks)

72. The central banks monetary liabilities as on 31 December 2005 stood at 10,500 MUC and Government < Answer >
money at 1,500 MUC. The currency deposit ratio is estimated to be 0.25. If the Central bank intends to
maintain the money supply at 48,000 MUC, what should be the reserve ratio specified by the Central
bank?
(a) 6.25%

(b) 8.10%

(c) 9.10%

(d) 5.00%

(e) 4.25%.
(2 marks)

73. The following information pertains to the balance of payments of a country for the year 2005-06:
Particulars

MUC

Merchandize imports

140,240

Merchandize exports

116,320

Services rendered to foreigners

230,010

Services rendered by foreigners to residents

125,234

Gifts sent to non-residents by the residents

2,000

Cash remitted by non-residents for their family maintenance

4,000

10

< Answer >

Income earned by residents on ownership of financial assets

1,000

Foreign direct investment

100,000

If the capital account balance (credit) is 202,000 MUC, what is the change in foreign exchange
reserves?
(a) 69,056 MUC
(b) 179,056 MUC
(c) 285,856 MUC
(d) 23,920 MUC
(e) 123,144 MUC.
(2 marks)
74. The monetary liabilities of the central bank of an economy are 20,000 MUC. The government money in < Answer >
the economy is 200 MUC. Currency deposit ratio for the economy is estimated to be 0.2 and reserve
ratio imposed by the central bank is 5 percent. If foreign exchange reserves of the country decline by
200 MUC, what would happen to the money supply?
(a) Decline by 960 MUC
(c) Decline by 820 MUC
(e) Decline by 480 MUC.

(b) Increase by 960 MUC

(d) Increase by 820 MUC
(2 marks)
< Answer >

75. The following data pertains to a hypothetical economy.

Consumption function (C) = 70 + 0.75Yd
Investment (I)
= 80 MUC
Government spending (G) = 70 MUC
Tax function (T)
= 0.2Y
At equilibrium, the budget surplus (deficit) in the economy is
(a) (30) MUC
(b) 30 MUC
(c) 40 MUC

(d) 50 MUC

(e) (40) MUC.

(2 marks)
< Answer >

76. If the marginal propensity to save is 0.25, the value of multiplier is

(a) 0.75

(b) 1.50

(c) 4.00

(d) 8.00

(e) 10.00.
(1 mark)

77. The following are the indicators of financial development of an economy for the year 2005.
Finance Ratio

0.25

Intermediation Ratio

0.70

If the Net Physical Capital Formation and the new issues for the year 2005 are 42,500 MUC and 30,000
MUC respectively, the financial interrelation ratio is
(a) 1.2
(b) 1.4
(c) 2.4
(d) 0.6
(e) 0.1.
(2 marks)

11

< Answer >

Suggested Answers
Economics (MB141) : January 2006
1.

Answer : (d)
Reason : An economy that relies on both markets and command
mechanism is called a mixed economy. Government as well
as business firm provides goods and services. In such
economies government supplies roads, defense, pensions,
and sometimes-even schooling directly to the citizens.

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2.

Answer : (a)
Reason : When the income elasticity is greater than one, the good is
said to be luxury.

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3.

Answer : (b)
Reason : On a straight-line demand curve elasticity of demand at any
point is equal to lower segment of the demand curve / upper
segment.
Option (a) is incorrect as elasticity of demand at midpoint is
equal to one.
Option (b) is correct as elasticity of demand falls as we move
down the demand curve.
Option (c), (d) and (e) are incorrect as elasticity of demand
falls as we move down the demand curve.

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4.

Answer : (c)
Reason: When a decrease in price leads to increase in quantity
purchased so much as to increase the total revenue, the price
elasticity of demand is more than unity.

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5.

Answer : (a)
Reason : The demand curve is Qd = 200 P
The quantity demanded is Q = 200 75 => Q =125
Therefore dQ/dP = -1 (the slope)

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Therefore point elasticity of demand = dQ/dPP/Q

Therefore, Ed = -1 (75/125)= - 0.6.
6.

Answer: (a)
Reason : Demand : 20 = 104 4Q
4Q = 84
Q = 21
Supply : 20 = 2 + 0.5Q
0.5Q = 18
Q = 36
Surplus : 36 21 = 15 units.

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7.

Answer : (b)
Reason : When tax is imposed, buyer and seller share the tax based on
the opposite ratios of their elasticities. Thus,
Ed = -80P/Q
Es = 40P/Q
Ratio of Es: Ed = 1: 2
Burden on consumer = 12 x 1/3 = 4
Earlier equilibrium price: 5,800 80P = 1,000 + 40P
4800 = 120P
P
=
40

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Thus, new price = 40 + 4 = Rs.44.

8.

Answer : (d)
Reason : Q = 10,000 1500(5) + 2(5000) + 200(8)
= 21,600 7,500
= 14,100

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Income elasticity of demand: dQ/dY Y/Q = 2

5000/14100 = 0.709
9.

Answer : (e)
Reason : a.

b.

c.

d.

e.

False. A consumer tends to maximize total utility (TU)

rather than marginal utility (MU). TU will be maximum
when MU is equal to the price paid by the consumer. If
the MU is greater than the price, the consumer can
increase TU by consuming more of the good. If MU is
less than the price, the consumer can maximize TU by
decreasing consumption of the good.
False. Apart from tastes and preferences (indifference
map), price of the product and income level of the
consumer (budget line) also determine how much of a
good a consumer will buy.
False. If magnitude of increase in demand is greater
than the magnitude of increase in supply, price will
increase. On the other hand if increase in supply is
greater than the increase in demand, price will decrease.
False. If the good under consideration is an inferior
good, increase in income would cause the demand to
fall.
True price and quantity demanded is inversely related
for normal goods.

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10. Answer : (c)

Reason : The demand curve of the consumer can be derived from the
price consumption curve. A price consumption curve
represents the successive points of tangency between the
different budget lines and the indifferent curves. Each point
on the (PCC) represents a price and quantity combination.
By plotting these price-quantity combinations, we can get the
corresponding point on the demand curve.

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11. Answer : (d)

Reason : When the management of a company has increased the salary
of the staff by 10%, it will not affect the implicit cost.
Implicit cost incurred by a firm is actually the opportunity
cost of the factor owned by him. Opportunity cost of any
input is the next best alternative use that is sacrificed by its
present use. It indicates what a factor can earn in the next
best use.
(a) Is not answer because when there is an increase in
salary of the staff by 10%, economic cost increases.
(b) Is not answer because when there is an increase in
salary of the staff by 10%, accounting profit decreases.
Because accounting profits is the firms total revenue
less its economic cost. So when the economic cost
increases, accounting profits decreases.
(c) Is not answer because when there is an increase in
salary of the staff by 10%, direct cost increases.
Because direct costs are costs which can be directly
contributed to production of a given product.
(d) Is the answer because when there is an increase in
salary of the staff by 10%, implicit cost will not be

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13

(e)

affected.
Is not answer because when there is an increase in
salary of the staff by 10%, fixed cost is affected, since
salary paid to administrative staff is fixed in nature.

12. Answer : (c)

Reason : MUA/PA = MUB/PB
1050/PA = 1575/60
PA = 1050 x 60/1575 = Rs.40.

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13. Answer : (b)

Reason : The consumer will consume till MUY = PY
MUY = 6Y
0.5Y = 10 Y = 20 units.

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14. Answer : (c)

Reason : The relationship between marginal product curve and
average product curve is such that when marginal product
curve cuts average product curve, the average product will be
at its maximum point. (a)Maximum point is reached when
MR = MC. (b)Total product reaches maximum when MP =
0. (c)When MP = AP, AP will be maximum. (d) Marginal
product will be maximum, when MP/ L = 0.(e)Marginal
product will be zero, when employing of an additional labor
does not result in increase of total product.

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15. Answer : (c)

Reason : The slope of the isoquant represents the Marginal Rate of
Technical Substitution (MRTS) between labor (L) and
capital (K). MRTS is equal to the ratio of the marginal
productivities of two factors.
a. The slope of the isocost curve represents ratio of wages
(w) and interest (r).
b. The slope of the indifference curve signifies marginal
rate of substitution of goods (MRS).
c. The slope of the isoquant curve signifies the marginal
rate of technical substitution (MRTS) between labor
and capital.
d. The slope of the budget line represents ratio of price of
good X and good Y.
e. The slope of the average cost curve only shows the rate
of change in average cost curve with respect change in
output.

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16. Answer : (d)

Reason : TPL = 20L L2
MPL = 20 2L
Marginal returns become negative, once MPL equals zero.
Thus,
20 2L = 0
Or, L = 10.

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17. Answer : (c)

Reason :

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MPL
MRTSL,K = MPK
Q = 10K0.5 L0.5

14

5
Q
0.5
0.5 1
0.5
L
MPL= L = 5L
= 5(L)
=
5
Q
0.5
0.5 1
0.5
K
K

= 5K
= 5(K)
=
MPK =

MRTSL,K

5
L0.5
5 K 0.5
K 0.5
K
5

0.5
0.5
0.5
5
L
L
K
=
=
=
= L.

18. Answer : (e)

Reason : Increasing returns to scale implies that a one percent increase
in the combination of inputs leads to increase the output by
more than one percent. Hence 22% increase could be the
possible answer. Hence the correct answer is (e).

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19. Answer : (c)

Reason : TC = 20Q 0.25 Q2 + 0.01Q3

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dTC
MC = dQ = 20 0.5 Q + 0.03Q2
dMC
MC is minimum when dQ = 0
dMC
dQ = -0.5 + 0.06 Q = 0
0.06 Q = 0.5
Q = 8.33
Q = 8 (approx).
20. Answer : (c)
Reason : Consumer surplus is the difference between what the
consumer is willing to pay and what he actually pays. The
maximum a consumer is willing to pay will be equal to the
utility he expects from the good. Therefore, consumer
surplus can also be defined as the difference between the
total utility derived and the amount of money paid by the
consumer.

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21. Answer : (d)

Reason : Opportunity cost of an hour of coaching for Sachin
Tendulkar is equal to the best opportunity forgone because of
coaching i.e. acting Rs.30,000.

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22. Answer : (b)

Reason : Total cost of producing four units of output = 6 + 5 + 4 + 5 =
20. Thus, the average cost of the firm = 20/4 = 5.

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23. Answer : (d)

Reason : AC = TC/Q = 300-10Q +Q2

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If Q =10AC = 300- (1010) +102= 300-100 + 100 = Rs.300.

24. Answer : (d)
Reason : Insurance premiums on property is an example of fixed cost.

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25. Answer : (e)

Reason : a.

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b.

Long run average cost (LAC = LTC/Q) is U-shaped

because of economies of scale initially and
diseconomies of scale at later stages of production.
Long run marginal cost (LMC = LTC/Q) is U-shaped
as cost of producing additional units reduces at the
15

beginning because of economies of scale, but raises

later due to diseconomies of scale.
c & d. Short run average cost (SAC = STC/Q) and AVC (=
TVC/Q) falls and raises due to operation of law of
diminishing marginal productivity.
e. Average fixed cost (AFC = TFC/Q) falls at a decreasing
rate with the increase of output because of constant total
fixed cost.
26. Answer : (e)
Reason : Least-cost production implies that the producer produces a
given level of output where the marginal physical product to
the factor price ratio is equal to the factor inputs.
a. It is not appropriate in this instance because it is
indicating that all factor prices are equal indicates the
demand and supply of that factor.
b. It is not appropriate in this instance because it indicates
the addition to total output by the employment of an
additional unit of a factor of production all else equal.
c. It is not appropriate in this instance because marginal
physical product is the slope of the total output curve
and therefore will not indicate the least cost production.
d. It is not appropriate in this instance because it is not
indicating the least-cost-production.
e. It is appropriate in this instance because, it is the change
in the total revenue of the firm that results from the
employment of one additional unit of a factor of
production. Therefore the marginal physical product to
factor price ratio equal to the factor inputs indicates the
least-cost production. The correct answer is (e).

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27. Answer : (d)

Reason : In this case, the firm makes more than normal profits. Here,
average revenue is more than average cost.

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28. Answer : (d)

Reason : In the short run a firm cannot avoid fixed costs. Whether the
firm undertakes production or not the fixed costs are incurred
by the firm. Therefore, the deciding factor for the firm is
whether it is able to recover its variable costs or not. As long
as the revenue (price) is greater than the variable (average
variable) cost it is in the interest of the firm to undertake
production.

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29. Answer : (d)

Reason : Perfect competition is a form of market structure which
represents a market without rivalry among the individual
firms. The characteristics of perfect competition are: Large
number of buyer and sellers Homogeneous product No
barriers to entry Perfect information Perfect mobility of
factors of production. There are large number of buyers and
the demand curve which is the marginal revenue curve is
horizontal to the x-axis implying that the producer can
produce as much as the quantity of output for a given level of
price. All the additional goods can be sold at the market price
only, hence in a perfect competition, P = MR = AR. Hence
the correct answer is (d).

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30. Answer : (b)

Reason : (a) True. In perfect competition there are many sellers and
buyers
(b) Not true. In perfect competition firms do not have any

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16

price making power as there are many sellers and the

product is homogeneous.
(c) True. In perfect competition product sold by all the
firms is assumed to be homogeneous.
(d) True. In perfect competition entry and exit of firms is
free.
(e) True. In perfect competition buyers and sellers have
access unlimited information which is available free of
cost.
31. Answer : (d)
Reason : Average revenue = total revenue/ no. of output sold = 290/29
= Rs.10.

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32. Answer : (d)

Reason : At break-even, TR = TC
TR = P x Q = 5Q
Thus, 5Q = 2850 + 3.5QOr, 1.5Q = 2850
Or, Q = 2850/1.5 = 1900 units.

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33. Answer : (b)

Reason : A firm will shut down its operations if the price is less than
average variable cost. Since under perfect competition, price
is also equal to marginal revenue, the firm will continue
operations in the short run so long as price is at least equal to
average variable cost. Thus the minimum price, which the
firm will shut down, is the minimum average variable cost.
AVC = 300 40Q + 2Q2 Minimum average variable cost:
AVC/ Q = 0 Thus, -40 + 4Q = 0 Or, Q = 10 When the
firm is producing 10 units, then AVC = 300 40(10) +
2(100) = 100.Thus, if price falls below Rs.100.

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34. Answer : (e)

Reason : There is no specified supply curve for monopolist.

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35. Answer : (a)

Reason : Single buyer is not a characteristic of monopoly.

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36. Answer : (d)

Reason : Free entry and exit of firms is not a predominant feature of
the oligopolistic market.

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37. Answer : (a)

Reason : Kinked-demand curve is used to explain price stickiness
under oligopoly. This is because of the discontinuity in the
MR curve caused by the kink in the demand curve. Even if
MC curve shifts substantially with in the gap of MR curve,
profit maximizing price and output of the oligopolist does
not change and price remain stabble.

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38. Answer : (b)

Reason :

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MC = TC/ Q = 10
Australia: MC = MRA
10 = 120 20QA
QA = 110/20 = 5.5 units
or P = 120 10(5.5) = Rs.65.
England: MC = MRE
10 = 52 6QE6QE = 42
Or, QE = 42/6 = 7 units
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P = 52 3(7) = Rs.31
Price differential :65 31 = Rs.34.
39. Answer : (d)
Reason : To find profit maximizing output MC must be equated to
MRP = 400 20 Q,
TR = 400Q 20 Q2.
MR =dTR/dQ=400 40 Q
and MC = dTC/dQ =40Q
MR = MC =400 40 Q =40 Q
80Q = 400
Q = 5 units.

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40. Answer : (c)

Reason : A variable is a stock if it is measured at a particular point of
time. It is a flow variable if it is measured over a period of
time.
a. Capital stock is measured at a particular point of time,
hence is a stock variable
b. A firms assets are measured at a particular point of
time, hence is a stock variable
c. Investment is measured over a period of time hence is a
flow variable.
d. Price index is measured at a particular point of time,
hence is a stock variable
e. Public debt is measured at a particular point of time,
hence is a stock variable

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41. Answer : (a)

Reason : a.

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42. Answer : (a)

Reason : Since the value added within the domestic territory will
belong to the domestic factor inputs, NDP at factor cost must
be equal to domestic factor income.
Hence answer is (a).
(b) Is not the answer because the net factor income earned
within the domestic territory of a country is not equal to
Net Domestic Product at market price.
(c) Is not the answer because the net factor income earned
within the domestic territory of a country is not equal to
Net National product at factor cost
(d) Is not the answer because the net factor income earned
within the domestic territory of a country is not equal to

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Value addition is equal to value of output less value of

inputs. By summing up all the value additions in the
economy GDP of the economy can be computed, which
is called value added approach to measuring GDP.
Hence the answer is (a).
b. By adding all the incomes of factors of production in
the economy, GDP can be computed which is called
income approach to measuring GDP. Hence (b) is not
the answer.
c. Is not the answer as we get real GDP by removing the
effect of inflation from nominal GDP.
d & e. Is not the answer as we get GDP through expenditure
approach by summing up all the expenditures incurred by the
ultimate buyers on the goods and services produced by the
domestic sector.

18

Net National Product at market price

(b) Is not the answer because the net factor income earned
within the domestic territory of a country is not equal to
Personal income.
43. Answer : (e)
Reason : GDP Deflator is a price index, which is used to measure the
average level of the prices of all goods and services that
make up GDP.
(a) Is not the answer because it is a true statement that GDP
deflator is otherwise known as implicit price deflator.
(b) Is not the answer because GDP deflator reflects the
change in overall price level in the economy.
(c) Is not the answer because GDP deflator is the most
comprehensive index of price.
(d) Is not the answer because GDP deflator is used to
measure real GNP i.e. GNP in rupees of constant
purchasing power. If prices are rising, the nominal GNP
during the latter period to account for the effects of
inflation.
(e) Is the answer because GDP deflator doesnt measure
economic growth.

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44. Answer : (a)

Reason : In the Circular flow model all the factors of production are
owned by Housholds and all the production activity is
undertaken by firms in the Business sector. Households
provide factor of production to firms in return for factor
payments. Business sector (firms) produce and sell goods
and services to the Households.

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45. Answer : (e)

Reason : Personal disposable income = Personal income Personal
taxes.
(a) Is not the answer because the difference between
personal disposable income and personal income is not
residential investment.
(b) Is not the answer because the difference between
personal disposable income and personal income is not
indirect taxes.
(c) Is not the answer because the difference between
personal disposable income and personal income is not
subsidies.
(d) Is not the answer because the difference between
personal disposable income and personal income is not
transfer payments.
(e) Is the answer because the difference between personal
disposable income and personal income is personal
taxes

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46. Answer : (b)

Reason : NNP at market price = GNP at market prices Depreciation
= 17,000 (1,200 700) = 16500
NNP at factor cost = NNP at market prices Indirect taxes +
subsidies
= 16500 600+ 200
= 16100
Net factor income from abroad =NNP at factor costNDP at
factor cost (Factor income earned with in domestic territory)

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19

= 16100 13000 = 3,100MUC.

47. Answer : (e)
Reason : National Income = GNP at market price Depreciation
Indirect taxes + Subsidies
= 8500950865+100
= 6785

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48. Answer : (c)

Reason : National income = NNP at factor cost
NNP at factor cost = GDP at market price Indirect taxes +
subsidies + NFIA Depreciation
Or, GDP at market price = NNP at factor cost + Indirect
taxes subsidies - NFIA + Depreciation
= 48000 + 11400 6000 ( 3000) + 12000 = 68400 MUC.
Where NFIA = (Factor income received from abroad
Factor income paid abroad) = (9000 12000) = -3000 MUC

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49. Answer : (e)

Reason : a.

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b.

c.

d.
e.

Consumption depends on the income and as income

increase consumption also increase.
Propensity to consume refers to the changes in
consumption as a result of change in income. Hence
propensity to consume effects consumption.
Propensity to save refers to changes in savings as a
results of changes in income. The level of savings
affects the level of consumption. Hence changes in
savings does affect consumption
Consumption demand does not depend upon the level
of wealth
Consumption demand does not depend upon the level
of marginal efficiency of investment.

50. Answer : (c)

Reason : National income (NNP at FC) = wages & salaries + interest
income + rental income + profit.
Or, Profit = 3000 1800 450 400 = 350.

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51. Answer : (c)

Reason : Consumption curve depicts the relationship between
consumption and income.
APS is given by the ratio between saving and Income.
Whereas the slope of the curve is given by the ratio between
change in consumption and income. Hence not correct
APC refers to the ratio between consumption and Income,
hence not the slope of the consumption curve which as said
above is given by changes in consumption as a result of
change in Income.
By definition, MPC refers to increase in consumption per
unit increase in income. Which is nothing but the slope of the
consumption curve. Hence the option is true.
MPS refers to change in savings as results of change in
income and slope of consumption curve gives the changes in
consumption as a result of change in income. Hence not true.
Level of consumption cannot be used to calculate slope of
the consumption curve as slope refers to ratio between
changes in consumption and changes in income.

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52. Answer : (e)

Reason : APS + APC = 1

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If APS < 0 , APC > 1

53. Answer : (b)
Reason : Monetary policy mainly controls the economy by regulating
the interest rates through changes in money supply. If the
private investment is more sensitive to interest rate, then
monetary policy can more effectively regulate the economy.
a. A recessionary condition cannot make a monetary
policy more effective.
b. When private investment is more sensitive to interest
rate monetary policy will be more effective as a small
change in the interest rate would lead to a greater
change in the output.
d. During liquidity trap, the effectiveness of monetary
policy decreases because during such policy, changes in
interest rate cannot have any effect on investments.
e. Effectiveness of the monetary policy is not determined
by the phases of business cycle.

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54. Answer : (a)

Reason : Total money = Rs.10,000.
25% of total money which is held in the form of currency is
Rs.2,500.
Demand deposit component of money supply is Rs.10,000
Rs.2,500 =Rs.7,500
Given the reserve ratio of 12%, required reserves are 7,500
0.12 = Rs.900.

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55. Answer : (a)

Reason : Stagflation refers to a situation where there is high
unemployment and high inflation occurs simultaneously.
Statement I is true as stagflation refers to coexistence of
stagnant output and high inflation.
Statement II is false because during stagflation, there is no
increase in output and hence the output is stagnant. Therefore
real GDP is not growing.
Statement III is true because during stagflation, the output is
stagnant, new employment opportunities are not created and
hence unemployment level is high.
Statement IV is false as the price are high and there is
unemployment, the aggregate demand tends to be low.
So the answer is (a).

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56. Answer : (c)

Reason : Fiscal deficit is revenue expenditure such as subsidy, interest
payments defense expenditure, salaries and pensions
financed by borrowings.
(a) Is not the answer because subsidies does not cause for
growing fiscal deficit of the Union Government
(b) Is not the answer because interest payments does not
cause for growing fiscal deficit of the Union Government
(c) Is the answer because reduction in revenue expenditure
is responsible for growing fiscal deficit of the Union
Government
(d) Is not the answer because employee salaries/pensions
do not cause for growing fiscal deficit of the Union
Government
(e) Is not the answer because defense expenditure does not
cause for growing fiscal deficit of the Union Government

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21

57. Answer : (b)

Reason : Bank rate is the rate of which commercial banks can borrow
from the Central Bank by discounting eligible bills with the
Central Bank.

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58. Answer : (c)

Reason : Supply side economics advocates promoting competition,
decreasing role for the state, incentives to production sector
like decreasing tax rates and reducing government controls
and removing institutional barriers to increase efficiency.
Supply-side economics do not advocate increase in the tax
rate. Hence answer is (c).

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59. Answer : (c)

Reason : Alternatives II and IV does not involve marketable
transaction hence ignored in calculation of national income.

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60. Answer : (a)

Reason : Phillips curve in the short-run shows an inverse relation
between 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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61. Answer : (a)

Reason : As the purchasing power of rupee decreases in future, due to
inflation, the real value of money paid by the borrowers to
the lender would be less. If inflation is anticipated, the lender
would include them in the interest rate.
a. An unexpected increase in inflation makes the borrower
to pay back money that has less real value than was
expected. As nominal interest rates do not include
unexpected inflation, real interest rate would be less
than the expected rate. Thus, borrower will be benefited
from unanticipated inflation.
b. Fixed income earners get only fixed nominal income.
With the inflation, the real value of money received
decreases. Hence they are losers during inflation.
c. Inflation reduces the purchasing power of the rupee
held and thereby reduces the value of rupee held by the
currency holders.
b. Because of unexpected increase in inflation the lender
receives money from the borrower which has a lesser
real value than expected. Interest rate on loans only
comprises expected inflation. Thus, lenders would
suffer from unexpected inflation by quoting less interest
rate than it should have been.

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62. Answer : (c)

Reason : An expansionary monetary policy is undertaken to stimulate
an economy moving at a slow pace. By injecting additional
money supply and easing the liquidity in the banking system
easy credit is made available for productive endeavor. A
reduction in cash reserves increase lend able resources of
banks. The correct answer is C along with it, reduction in
bank rate and buying government securities stimulate the
economy. Devaluation is undertaken in an extreme case of a
persistent deficit in BOP.
(a) Is not the answer because increase in bank rate is a
contractionary monetary policy.
(b) Is not the answer because increase in cash reserve ratio
is a contractionary monetary policy
(c) Is the answer because reduction in cash reserve ratio is

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22

(d)
(e)

an expansionary monetary policy

Is not the answer because selling government securities
in open market is not an expansionary monetary policy
Is not the answer because devaluation of the currency is
not an expansionary monetary policy.

63. Answer : (a)

Reason : Automatic stabilizers refer to those government spending and
tax revenues that change automatically as the economy
fluctuate. This prevents aggregate demand from falling
excessively during bad times and rising during good times.
National defense spending is not an automatic stabilizer
because it is less concerned with the ups and downs in the
economy.
a. National defense spending changes depending upon the
security situation and not on the business cycles. Thus,
national defense spending does not signify an automatic
stabilizer.
b. Social welfare payments are made during economic
downturns that prevent aggregate demand from falling
excessively during economic downturn. But, once the
economy picks up the social welfare payments will
decrease which prevent aggregate demand from rising
excessively.
c. Unemployment compensation payments increase during
the economic downturn because of higher rate of
unemployment caused by reduced business activity.
Unemployment compensation payments prevent
aggregate demand from falling excessively during
economic downturn. On the contrary, these payments
will be low no sooner than the economy picks up. This
prevents aggregate demand from rising excessively.
d. & (e) tax revenues automatically change depending
upon the profits generated by the firms. It would be
lower during downturn and higher during boom.

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64. Answer : (c)

Reason : Consumption function for an economy is estimated to be c =
400 + 0.75 Yd
Y=C+S
When S = 0, Y = C

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Y = 400 + 0.75 Y
or, 0.25Y = 400
Yd = 1,600
c = 400 + 0.75 ( 1,600) = 400 + 1,200 = Rs.1,600 cr.
65. Answer : (c)
Reason : Money supply (Ms) = High-powered money (H) {(1 +
Cu)/(Cu + r)}
Where
Cu = currency deposit ratio
R = cash reserve ratio.
H
= Monetary liabilities (ML) +
Government money
{(1 + Cu)/(Cu + r)} = Money multiplier
When the cash reserve ratio (CRR) is reduced, the money
multiplier increases and hence the money supply.
a. Monetary liabilities of the Central Bank consist of
currency with the public, reserves of commercial banks
and other deposits. Changes in the CRR do not affect
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b.

c.

d.

e.

monetary liabilities of the RBI because decrease in

reserves is offset by the increase in currency with the
public. Hence, monetary liabilities remain the same for
a given change in CRR.
As monetary liabilities are part of high-powered money,
hence changes in the CRR do not affect the highpowered money also.
Money multiplier = {(1 + Cu)/(Cu + r)}. Hence
decrease in the CRR increases the value of the money
multiplier.
Money supply in the economy increases with the cut in
the CRR because of increase in the value of money
multiplier. When money supply increases, the interest
rates in the economy falls, leading to increase in
consumption and investment. This results in increase in
aggregate demand in the economy.
When money supply increases because of reduction in
the CRR, the aggregate demand in the economy
increases. Higher aggregate demand leads to higher
price levels in the country.

66. Answer : (d)

Reason : Outside lag is the duration involved for output and
employment to respond to changes of the implemented of
policies. Taxes has the least outside lag.
(a) Is not the answer because cash reserve ratio has not the
least outside lag.
(b) Is not the answer because bank rate has not the least
outside lag
(c) Is not the answer because repo rate has not the least
outside lag
(d) Is the answer because tax has the least outside lag.
(e) Is not the answer because open market operation has
not the least.

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67. Answer : (d)

Reason : a. Reserves with RBI (both surplus reserves and statutory
reserves) are assets of a commercial bank.
b. Loans given to public sector undertakings are assets of
the banks.
c. Credit given to any individual, firm or government is an
asset to the bank lend.
d. Deposits from the public are liabilities to the bank
because it has to repay the amount at a later time.
e. Discounted commercial bills from the public are assets
to the bank because it purchased (discounted) the bills
from the holder of the bill.

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68. Answer : (d)

Reason : A depression is immediate followed by recovery
(a) During recovery unemployment rate decreases because
of picking up of economy activity
(b) Depression is immediately followed by recovery and
not recession
(c) Only during boom there will be rapid increase in wages
because of high business activity
(d) It is true that during recovery the cost of production will
gradually increase because of gradual increase in wages
(e) Production will increase moderately during recovery.

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69. Answer : (c)

Reason : The periodic upswings and down swings in the level of
economic activity which forms a regular pattern with an
expansion of activity followed by a contraction ,succeeded
by further expansion are referred to as business cycles.
Certain features characterize each of the phases.
(a) Mere existence of unemployment cannot be taken, as an
indicator of recession or depression, as in a country like
India, even though the economy is growing these is
unemployment. Hence not true.
(b) Price levels are only an indicator of purchasing power,
which in turn is dependent on income levels of the
people also. Hence cannot be taken as primarily
indicator of the different phases of business cycles.
(c) By definition, a business cycle is a swing in total
national output; income and employment market by
contraction or expansion in many sectors of the
economy changes in real GNP brings changes in prices,
employment. Hence only the basis of changes in real
GDP different phases is classified. Hence real GDP is
the correct option.
(d) Changes in inventory level do give an indication about
the different phases, but the changes inventory levels
are as a result of changes in real GDP.
(e) Gross investment is dependent on future growth rate,
which again based on estimation of real GDP in future.
Hence gross investment cannot be primarily indicator.

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70. Answer : (a)

Reason : Overall balance of payment = Total Credit of the Bop Total
debit of the Bop
= 439677 378737 = Rs.60940million (surplus)

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71. Answer : (d)

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Reason : Velocity of money =

Total expenditure =
1620
Money supply
=

Total expenditure(PY)
Money supply (M)
C + I + G = 1000+340+280 =
1620/4 = Rs.405cr.

72. Answer : (a)

Reason : High powered money = monetary liabilities + government
money = 10,500 + 1,500 = 12,000

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1 + C u ) / (C u + r )}
Ms = H {(

48,000

4r
r

=
=
=
=
=

1 + 0.25 ) / (0.25 + r )}
12,000 {(
(1 + 0.25)/(0.25 + r) = 4
1 + 4r = 1 0.25
0.25
0.0625 =
6.25%.

73. Answer : (c)

Reason : Change in foreign exchange reserves = Current account
balance + Capital account balance
Current account balance = (116,320 + 230,010 + 4000 +
1000) - (140,240 + 125,234 + 2000) = 351330 267474 =
83856 i.e. current account surplus (Credit)
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Thus, change in foreign exchange reserves = 83856 +

202,000 = 285856 MUC.
74. Answer : (a)
Reason : Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where
High powered money = monetary liabilities of the central
bank + government money.

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Ms = H. m
When foreign exchange reserves of the country decline by
Rs.200 MUC, the monetary liabilities also fall by 200 MUC.
Thus, money supply decline by 4.8 x 200 = 960.
75. Answer : (c)
Reason : Y = C + I+ G
Y = 70 + 0.75Yd + 80 + 70
Y = 70 + 0.75 (Y 0.2 Y)+ 80 + 70
Y = 70 + 0.75 Y 0.15 Y+ 80 + 70
Y = 220 0.6Y
Y = 550

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Budget deficit = T G = 0.2 (550) 70 = 110 70 = 40

MUC.
76. Answer: (c)
Reason: Multiplier is the reciprocal of marginal propensity to save
(MPS)
Multiplier
= 1/MPS

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1
0.25 = 4.

77. Answer : (a)

Reason : Intermediation Ratio = Secondary issues/New issues
Or, secondary issues = Intermediation ratio x New issues =
0.7 x 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 /42500 = 1.2.
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