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

CRR refers to:

Accepted Answer

CRR is deposits banks must keep with the central bank.

Question 4

A key determinant of growth is:

Accepted Answer

Investment raises capital stock and productive capacity.

Question 5

Monetary policy is mainly conducted by:

Accepted Answer

Central bank conducts monetary policy by controlling money and credit.

Question 6

Inflation is:

Accepted Answer

Inflation is a sustained rise in the general price level.

Question 7

GDP measures:

Accepted Answer

GDP is domestic production within a country’s borders.

Question 8

Cost-push inflation is mainly due to:

Accepted Answer

Higher costs reduce AS and raise prices.

Question 9

Repo rate is:

Accepted Answer

Repo rate is the policy rate for lending to banks (simplified).

Question 10

In C = a + bY, “a” represents:

Accepted Answer

a is autonomous consumption (consumption when income is zero).

Question 11

Unemployment arising due to change of jobs and search for jobs is known as:

Accepted Answer

Frictional unemployment is short-term and occurs due to normal job search and matching frictions. It exists even in a growing economy.

Question 12

Contractionary fiscal policy is mainly used to:

Accepted Answer

It reduces demand pressure to control inflation.

Question 13

Balance of payments is related to:

Accepted Answer

BOP records international receipts and payments.

Question 14

An increase in government spending directly increases:

Accepted Answer

G is a component of AD, so higher G increases AD.

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

Which is a determinant of investment?

Accepted Answer

Interest rate affects cost of borrowing and investment decisions.

Question 18

Which is a development indicator?

Accepted Answer

Life expectancy is a health/welfare indicator.

Question 19

Full employment as a macro goal mainly relates to:

Accepted Answer

Full employment means unemployment is low (not necessarily zero).

Question 20

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 21

State the relation between MPC and MPS.

Accepted Answer

In a simple model, MPC + MPS = 1.

Question 22

What is cost-push inflation?

Accepted Answer

Cost-push inflation occurs when production costs rise and aggregate supply shifts left, raising prices.

Question 23

What is meant by output gap?

Accepted Answer

Output gap is the difference between actual GDP and potential GDP; a negative output gap indicates that the economy is producing below capacity.

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 demand-pull inflation?

Accepted Answer

Demand-pull inflation is a rise in the general price level due to an increase in aggregate demand.

Question 26

Define inflation.

Accepted Answer

Inflation is a sustained rise in the general price level over time, reducing the purchasing power of money.

Question 27

Define consumption.

Accepted Answer

Consumption is expenditure by households on goods and services for satisfying wants.

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 aggregate supply (AS).

Accepted Answer

Aggregate supply is the total output of final goods and services produced in an economy at different price levels during a period.

Question 30

What is NDP?

Accepted Answer

NDP (Net Domestic Product) = GDP − Depreciation.

Question 31

Write a short note on disguised unemployment.

Accepted Answer

Disguised unemployment refers to a situation where more workers are employed than required, so the marginal productivity of some workers is very low (sometimes near zero).

It is common in agriculture and informal activities in developing economies. If a few workers are withdrawn, total output may not fall significantly.

Example: many family members working on a small farm where output does not increase with extra workers.

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

Write any three limitations of macroeconomic analysis.

Accepted Answer

Limitations of macroeconomic analysis include:

1) Aggregates hide inequalities and sector-wise differences.
2) Data may be delayed or revised, affecting accuracy.
3) Many factors interact; isolating one cause is difficult.

(Any three limitations can be written.)

Question 34

Write any three objectives of monetary policy.

Accepted Answer

Objectives of monetary policy include:

1) Price stability (control inflation).
2) Economic growth and employment support.
3) Financial stability and smooth functioning of payments/credit.

(Any three objectives 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

Explain measures to control inflation with a flowchart and brief explanation.

Accepted Answer

Inflation control depends on whether inflation is mainly demand-pull (too much demand) or cost-push (higher costs/supply shortage). Policies should be selected accordingly.

```mermaid
flowchart LR
  A[Identify cause] --> B[Demand-pull]
  A --> C[Cost-push]
  B --> D[Tight monetary policy
Raise rates/CRR, reduce credit]
  B --> E[Fiscal restraint
Reduce deficit spending]
  C --> F[Supply measures
Increase production, improve logistics]
  C --> G[Admin measures
Anti-hoarding, better distribution]
```

To control demand-pull inflation, the central bank may raise interest rates and reduce credit, while the government may reduce deficit spending and avoid unnecessary expenditure. To control cost-push inflation, supply-side measures such as increasing output, improving distribution, reducing bottlenecks and importing essentials may be required. In the short run, administrative steps like controlling hoarding can also help.

Thus, inflation control requires a balanced mix of monetary, fiscal and supply-side policies based on the cause of inflation.

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

Explain the three methods of measuring national income with a comparison table.

Accepted Answer

National income can be measured using three standard methods. In theory, if data are correct, all three give the same result because production, income and expenditure are three views of the same economic activity.

1) **Output/Value-added method**: Calculates the value added by each sector (output minus intermediate inputs) and sums it to get GDP.
2) **Income method**: Sums factor incomes earned in production such as wages, rent, interest and profit (including mixed income).
3) **Expenditure method**: Sums final expenditure on goods and services: GDP = C + I + G + (X − M).

| Method | What is added | Key advantage | Key precaution |
|---|---|---|---|
| Output/Value-added | value added across sectors | avoids double counting | measure intermediate inputs correctly |
| Income | wages, rent, interest, profit | shows income distribution | avoid counting transfer payments |
| Expenditure | C + I + G + (X − M) | links to demand and policy | include only final spending |

Thus, these methods together provide a complete understanding of output, income and spending in the economy.

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

Differentiate between frictional, structural and cyclical unemployment.

Accepted Answer

### Meaning and differences
Unemployment can be classified into frictional, structural and cyclical types based on its causes.

- **Frictional unemployment** arises due to job search and matching frictions. It is short-term and exists even in a healthy economy. Example: a person changing jobs.
- **Structural unemployment** arises due to mismatch of skills/locations with available jobs because of structural change (technology, industry shifts). It is often long-lasting. Example: workers displaced by automation needing re-skilling.
- **Cyclical unemployment** arises due to downturns in the business cycle when aggregate demand falls. Example: layoffs during recession.

| Basis | Frictional | Structural | Cyclical |
|---|---|---|---|
| Main cause | Job search/matching time | Skill/location mismatch | Fall in aggregate demand |
| Typical duration | Short | Longer | Depends on recession length |
| Example | Switching jobs | Tech displacement | Recession layoffs |

Thus, the policy focus differs: frictional needs better job matching, structural needs re-skilling/mobility, and cyclical needs demand management.

Macro Economics — Question Paper

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