Question 1

Balance of Payments (BOP) is:

Accepted Answer

BOP records international economic transactions.

Question 2

Higher MPC leads to:

Accepted Answer

Higher MPC means more re-spending so multiplier is larger.

Question 3

A rightward shift in AD generally leads to:

Accepted Answer

With upward-sloping SRAS, AD right shift raises Y and P.

Question 4

A key determinant of growth is:

Accepted Answer

Investment raises capital stock and productive capacity.

Question 5

Aggregate demand (AD) equals:

Accepted Answer

AD is total planned spending: C + I + G + (X − M).

Question 6

Cyclical unemployment generally increases during:

Accepted Answer

In recession, aggregate demand and output fall. Firms reduce production and labour demand, which raises layoffs and cyclical unemployment.

Question 7

Which phase of business cycle is characterized by falling output and rising unemployment?

Accepted Answer

Recession (contraction) involves declining output and income, reduced investment, and rising unemployment. Price pressures may moderate.

Question 8

CRR refers to:

Accepted Answer

CRR is deposits banks must keep with the central bank.

Question 9

Demand-pull inflation is mainly due to:

Accepted Answer

Demand-pull inflation arises from rising AD.

Question 10

GNP is related to GDP by:

Accepted Answer

GNP adds net factor income from abroad to GDP.

Question 11

Deflation means:

Accepted Answer

Deflation is sustained fall in general price level.

Question 12

Contractionary fiscal policy is mainly used to:

Accepted Answer

It reduces demand pressure to control inflation.

Question 13

Okun’s law (idea) indicates an inverse relationship between:

Accepted Answer

Okun’s law summarizes that when output falls relative to potential, unemployment tends to rise; when output increases strongly, unemployment tends to fall.

Question 14

If MPC increases, the multiplier becomes:

Accepted Answer

Higher MPC means more re-spending, so multiplier is larger.

Question 15

A BOP deficit can be financed by:

Accepted Answer

Deficit can be met by reserves drawdown or capital inflows/borrowing.

Question 16

Growth without development can happen when:

Accepted Answer

If growth is unequal, welfare indicators may not improve much.

Question 17

Value-added method helps avoid:

Accepted Answer

Summing value added avoids counting intermediate goods multiple times.

Question 18

Which is a development indicator?

Accepted Answer

Life expectancy is a health/welfare indicator.

Question 19

Mismatch between workers’ skills and job requirements leads to:

Accepted Answer

Structural unemployment arises due to changes in the structure of the economy (technology/industry/location) that create a skills or geographic mismatch.

Question 20

Hyperinflation refers to:

Accepted Answer

Hyperinflation is extremely high, rapid inflation.

Question 21

What is Real GDP?

Accepted Answer

Real GDP is GDP measured at constant/base year prices to show true growth in output.

Question 22

What is repo rate?

Accepted Answer

Repo rate is the rate at which the central bank lends short-term funds to commercial banks against securities.

Question 23

State one effect of inflation.

Accepted Answer

One effect is fall in purchasing power/real income (any one).

Question 24

Define taxation.

Accepted Answer

Taxation is a compulsory payment made to the government without direct return for specific services.

Question 25

What is APC?

Accepted Answer

APC (average propensity to consume) is the ratio of consumption to income (C/Y).

Question 26

Define monetary policy.

Accepted Answer

Monetary policy is the policy of the central bank to regulate money supply, interest rates and credit conditions to achieve macroeconomic objectives.

Question 27

Define GDP.

Accepted Answer

GDP (Gross Domestic Product) is the total value of final goods and services produced within a country during a year.

Question 28

Define economic growth.

Accepted Answer

Economic growth is a sustained increase in real output or real national income (real GDP) over time.

Question 29

Define saving.

Accepted Answer

Saving is the part of income not spent on consumption; in a simple model S = Y − C.

Question 30

State one objective of macroeconomic policy.

Accepted Answer

One objective is price stability/economic growth/full employment/external balance (any one).

Question 31

Mention any three effects of deflation.

Accepted Answer

Effects of deflation include:

1) Consumers postpone purchases, reducing demand.
2) Profits and output fall; unemployment rises (recession).
3) Real burden of debt increases, making repayment harder.

(Any three effects can be written.)

Question 32

Write any three features of inclusive growth.

Accepted Answer

Features of inclusive growth include:

1) Broad-based job creation and opportunities for all.
2) Reduction in poverty and inequality.
3) Access to health, education and basic services across groups/regions.

(Any three features can be written.)

Question 33

Explain measures to reduce cyclical unemployment.

Accepted Answer

Cyclical unemployment can be reduced through demand management policies:

- **Expansionary fiscal policy**: higher government expenditure or lower taxes increases aggregate demand, output and employment.
- **Expansionary monetary policy (RBI)**: lower interest rates and adequate liquidity encourage investment and consumption, raising output and jobs.
- **Stabilisation measures**: timely policy response reduces the depth and duration of recession.

Question 34

State any three components of aggregate demand and explain briefly.

Accepted Answer

Components of AD include:

1) Consumption (C): household spending.
2) Investment (I): spending on capital goods/inventories.
3) Government expenditure (G): government final spending.

(Any three including net exports can be written.)

Question 35

Write any three indicators of economic growth.

Accepted Answer

Indicators of economic growth include:

1) Real GDP growth rate.
2) Real per capita income growth.
3) Productivity growth (output per worker).

(Any three indicators can be written.)

Question 36

Differentiate monetary policy and fiscal policy with examples and a comparison table.

Accepted Answer

Monetary policy and fiscal policy are two major tools of macroeconomic management. Monetary policy is conducted by the central bank to regulate money supply and interest rates, whereas fiscal policy is conducted by the government through taxation and public expenditure.

| Point | Monetary policy | Fiscal policy |
|---|---|---|
| Authority | central bank | government |
| Main tools | repo rate, OMO, CRR, SLR | taxes, public spending, budget deficit |
| Direct impact | credit conditions and interest rates | aggregate demand via spending and taxes |
| Example | raising repo rate to control inflation | increasing government spending to boost demand |

For example, if inflation rises, the central bank may increase policy rates to reduce borrowing and spending. If unemployment is high, the government may increase public expenditure or reduce taxes to raise demand.

Thus, both policies aim to stabilize the economy, but they work through different instruments and authorities.

Question 37

Describe measures/indicators of growth and development using a table.

Accepted Answer

To evaluate a country’s progress, economists use different indicators for growth and for development.

Growth indicators mainly measure output and income:

- real GDP growth rate
- real per capita income growth
- productivity growth (output per worker)

Development indicators measure welfare and quality of life:

- HDI (health, education, income)
- poverty and inequality measures
- life expectancy, infant mortality, literacy
- access to basic services (water, sanitation, housing)

| Category | Typical indicators | What they show |
|---|---|---|
| Growth | real GDP, per capita income, productivity | increase in output and income |
| Development | HDI, health/education, poverty/inequality | improvement in living standards |

Therefore, a complete assessment of a country requires both growth and development measures, not GDP alone.

Question 38

Discuss the objectives of macroeconomic policy and explain how they are related. Use a simple flowchart.

Accepted Answer

Macroeconomic policy aims to achieve stable and sustainable economic performance. The main objectives are economic growth, price stability, full employment, external balance and equitable distribution.

Key objectives:

1) **Economic growth**: increasing real output and income over time.
2) **Price stability**: controlling inflation so that purchasing power remains stable.
3) **Full employment**: reducing unemployment and creating job opportunities.
4) **External balance**: maintaining a healthy balance of payments and stable exchange rate.
5) **Equity**: ensuring benefits of growth reach different sections of society.

These objectives are interconnected. For example, high inflation can reduce real wages and savings, hurting growth. Low growth can increase unemployment. Therefore, policymakers try to balance objectives.

```mermaid
flowchart LR
  A[Economic Growth] --> B[Higher Employment]
  B --> C[Higher Income & Demand]
  C --> D[Risk of Inflation]
  D --> E[Need for Price Stability]
  E --> A
```

Thus, macro policy targets must be pursued together, with careful balance, to achieve sustainable development and economic stability.

Question 39

Explain determinants of economic growth and development with a flowchart and brief explanation.

Accepted Answer

Economic growth and development depend on multiple factors. Growth mainly depends on capital formation and productivity, while development also needs social progress and inclusive policies.

Key determinants include:

1) **Capital formation (investment)**: building infrastructure and capital stock raises productive capacity.
2) **Human capital**: education and skills improve labor productivity.
3) **Technology and innovation**: increases efficiency and competitiveness.
4) **Institutions and governance**: stable policies, rule of law and low corruption support investment.
5) **Inclusive policies**: ensure benefits reach all groups through health, education and employment.

```mermaid
flowchart LR
  A[Investment & capital formation] --> B[Higher productivity]
  C[Human capital] --> B
  D[Technology & innovation] --> B
  B --> E[Higher output & income]
  E --> F[Development: better health, education, jobs]
  G[Inclusive policies & good governance] --> F
```

Thus, growth is strengthened by investment, human capital and technology, while development requires inclusive institutions and social progress so that rising income translates into better living standards.

Question 40

Explain inflation and its types with a suitable table.

Accepted Answer

Inflation is a sustained rise in the general price level of goods and services over time. It reduces the purchasing power of money, meaning the same amount of money buys fewer goods than before.

Inflation can be classified in different ways. The most important classification by cause is demand-pull and cost-push inflation.

| Type | Main cause (AD–AS idea) | Output effect | Example |
|---|---|---|---|
| Demand-pull | AD increases faster than AS | output often rises | higher government spending or credit boom |
| Cost-push | AS decreases due to rising costs | output falls; prices rise | oil price shock, wage hike |

Inflation can also be classified by speed: creeping (slow), walking (moderate), running (fast) and hyperinflation (extremely rapid).

Thus, knowing the types of inflation helps to identify causes and choose appropriate policy measures to control it.

Macro Economics — Question Paper

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