Macroeconomics Questions and Answers

Q: In the long run, the autonomous consumption will

In the long run the autonomous consumption will be zero.Studies of long-run data, beginning with Kuznets, show that consumption is a constant proportion of income. The long-run consumption function therefore passes through the origin, so there is no autonomous part of consumption. The short-run function has a positive intercept, which falls away over a long period as income grows.It is not infinite, it does not stay unchanged, and it does not merely decline but stay positive. Only zero fits the proportional long-run function.

Q: Which of the following statements is not true in case of the balanced budget multiplier ?

None of the statements is untrue, so the answer is None of the above.The first round contractionary effect of a tax increase is \(-b\Delta T\), which is smaller than the first round expansionary effect \(\Delta G\) of equal government spending because b, the MPC, is less than one. The tax multiplier with proportional taxes is \(\frac{-b}{1-b+bt}\). With lump sum taxes the balanced budget multiplier is exactly one, since the expenditure multiplier \(\frac{1}{1-b}\) and the tax multiplier \(\frac{-b}{1-b}\) add up to one.All three statements are correct, so the option 'None of the above' is the right choice for 'not true'.

Q: For a small economy in a flexible exchange rate system that begins in the long-run equilibrium point, a higher rate of inflation in the shortrun will be followed by

The keyed answer is contractionary monetary policy and real exchange rate appreciation.When domestic inflation rises above that abroad, domestic goods become dearer relative to foreign goods, which appreciates the real exchange rate and reduces net exports. The central bank, to bring inflation back to the earlier long-run path, then tightens money, which is a contractionary policy.The option with a decline in net exports but a rise in the exchange rate does not fit the real appreciation. The options with an expansionary policy or an increase in net exports go the wrong way for an economy that has an inflation problem.

Q: A positively sloped aggregate supply curve indicates that

A positively sloped aggregate supply curve means that an increase in aggregate demand is associated with an increase in both the price level and equilibrium output.On an upward sloping supply curve a rise in demand moves the economy along the curve to a higher price level and a higher level of output.With a vertical supply curve output would not change, which is the first option, and with a horizontal curve the price level would not change, which is the third option. Neither is the case with a positive slope.

151.

Which of the following statements is false ?

A.The balanced budget multiplier is unity when taxes are lump sum taxes.
B.The balanced budget multiplier is less than unity when taxes are ad valorem taxes.
C.Tax multiplier is less than government expenditure multiplier.
D.Tax multiplier is more than government expenditure multiplier.

Exam Year(s)

UGC NET - 2013,

Answer: D

The false statement is that the tax multiplier is more than the government expenditure multiplier. The tax multiplier is -b/(1-b) and the expenditure multiplier is 1/(1-b), so in absolute terms the tax multiplier is smaller by the factor b, which is less than one. The balanced budget multiplier, the sum of the two, is unity with lump sum taxes, and it is less than unity if taxes are ad valorem. So (A), (B) and (C) are true and (D) is false. The multipliers can be read from the simple Keynesian model with taxes and government expenditure.

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152.

Macro economics distinguishes between the real economy and

A.virtual economy
B.monetary economy
C.normative economy
D.underground economy

Exam Year(s)

UGC NET - 2013,

Answer: B

Macroeconomics distinguishes between the real economy, which deals with output, employment and real resources, and the monetary economy, which brings in money, prices and financial assets. The terms virtual economy and underground economy are used in other senses, and the normative economy is not a recognised division of the subject (normative and positive describe types of statements). So the monetary economy is the answer. Money, interest and the price level matter in the monetary economy, where in the real economy relative prices and quantities are the focus.

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153.

Match the items in List - I with the items in List - II :

List - I	List - II
i. Psychological Law of Consumption	1. Ratchet Effect
ii. Relative Income Hypothesis	2. Age Structure of the Population
iii. Permanent Income Hypothesis	3. Distribution of Income
iv. Life Cycle Hypothesis	4. Backward Looking Expectations

Codes : i ii iii iv

A.3 1 4 2
B.2 4 1 3
C.3 1 2 4
D.4 2 3 1

Exam Year(s)

UGC NET - 2013,

Answer: A

The key matches the psychological law of consumption with the distribution of income (3), the relative income hypothesis with the ratchet effect (1, Duesenberry), the permanent income hypothesis with backward looking expectations (4, Friedman's adaptive expectations) and the life cycle hypothesis with the age structure of the population (2, Modigliani). That is code A: i-3, ii-1, iii-4, iv-2. The other codes break at least the well known pairs of ratchet effect with relative income and age structure with the life cycle.

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154.

Assertion (A) : The Natural Rate of Unemployment Hypothesis yields in the long run a vertical Phillips Curve.

Reason (R) : The Natural Rate of Unemployment assumes static price expectations.
Codes :

A.(A) is correct and (R) is the correct explanation of (A).
B.Both (A) and (R) are correct and (R) is not the correct explanation of (A).
C.(A) is correct, but (R) is incorrect.
D.Both (A) and (R) are incorrect.

Exam Year(s)

UGC NET - 2013,

Answer: C

Assertion (A) is correct: the natural rate hypothesis (Friedman and Phelps) says that in the long run unemployment returns to its natural rate whatever the rate of inflation, so the long-run Phillips curve is vertical. Reason (R) is incorrect: the hypothesis rests on adaptive expectations, in which people revise their price expectations as inflation changes, and not on static expectations. So (A) is correct but (R) is incorrect, which is the third option.

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155.

In the context of different business cycle theories match the nature of cycle/approach given in List - I with the propounders in List - II :

List - I	List - II
i. Constrained Cycles	1. Paul A. Samuelson
ii. Acceleration - Multiplier Interaction Approach	2. J. R. Hicks
iii. Capital - Stock Adjustment Principle	3. Nicholas Kaldor
iv. Real Business Cycles	4. Robert J. Barro

Codes : i ii iii iv

A.2 1 3 4
B.1 2 4 3
C.2 1 4 3
D.1 3 2 4

Exam Year(s)

UGC NET - 2013,

Answer: A

The official matching is i-2, ii-1, iii-3, iv-4, which is code A. Constrained cycles are the work of J.R. Hicks, the acceleration-multiplier interaction approach is that of Paul Samuelson, the capital stock adjustment principle is credited in the key to Nicholas Kaldor, and real business cycles to Robert Barro. Codes B, C and D swap Hicks with Samuelson or give the real business cycle to someone else.

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156.

Assuming fixed prices, which of the following statements are true ?

1. Monetary policy is more effective, flatter the IS-curve.
2. Fiscal policy is less effective, flatter the LM curve.
3. Fiscal policy is more effective, flatter the LM curve.
4. Monetary policy is ineffective and fiscal policy is fully effective in liquidity trap.
Codes :

A.1, 2, 4
B.1, 3, 4
C.2, 3, 4
D.None of the above

Exam Year(s)

UGC NET - 2013,

Answer: B

With fixed prices the IS-LM model gives these results. Monetary policy is more effective the flatter the IS curve, since a given fall in the interest rate raises investment and income a lot (statement 1 is true). Fiscal policy is more effective the flatter the LM curve, since there is less crowding out (statement 3 is true, so statement 2, which says the opposite, is false). In a liquidity trap the LM curve is horizontal, so fiscal policy is fully effective and monetary policy fails (statement 4 is true). So 1, 3 and 4 are correct.

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157.

In the long run, the autonomous consumption will

A.be infinity
B.remains unchanged
C.decline but will remain positive
D.be zero

Exam Year(s)

UGC NET - 2013,

Answer: D

In the long run the autonomous consumption will be zero.

Studies of long-run data, beginning with Kuznets, show that consumption is a constant proportion of income. The long-run consumption function therefore passes through the origin, so there is no autonomous part of consumption. The short-run function has a positive intercept, which falls away over a long period as income grows.

It is not infinite, it does not stay unchanged, and it does not merely decline but stay positive. Only zero fits the proportional long-run function.

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158.

Which of the following statements is not true in case of the balanced budget multiplier ?

A.The first round contractionary effect of additional tax revenue (\(-b\Delta T\); b = MPC) is less than the explanatory effect of additional Government expenditure (= \(\Delta G\)).
B.The value of tax multiplier for proportional taxes is \(\frac{-b}{1-b+bt}\) (where b = MPC and t = tax rate).
C.The value of balanced budget multiplier is unity when taxes are lump sum taxes.
D.None of the above

Exam Year(s)

UGC NET - 2013,

Answer: D

None of the statements is untrue, so the answer is None of the above.

The first round contractionary effect of a tax increase is \(-b\Delta T\), which is smaller than the first round expansionary effect \(\Delta G\) of equal government spending because b, the MPC, is less than one. The tax multiplier with proportional taxes is \(\frac{-b}{1-b+bt}\). With lump sum taxes the balanced budget multiplier is exactly one, since the expenditure multiplier \(\frac{1}{1-b}\) and the tax multiplier \(\frac{-b}{1-b}\) add up to one.

All three statements are correct, so the option 'None of the above' is the right choice for 'not true'.

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159.

For a small economy in a flexible exchange rate system that begins in the long-run equilibrium point, a higher rate of inflation in the shortrun will be followed by

A.An increase in the exchange rate and decline in net exports.
B.Decrease in the exchange rate and an increase in net exports.
C.Contractionary monetary policy and real exchange rate appreciation.
D.Explanatory monetary policy and real exchange rate depreciation.

Exam Year(s)

UGC NET - 2013,

Answer: C

The keyed answer is contractionary monetary policy and real exchange rate appreciation.

When domestic inflation rises above that abroad, domestic goods become dearer relative to foreign goods, which appreciates the real exchange rate and reduces net exports. The central bank, to bring inflation back to the earlier long-run path, then tightens money, which is a contractionary policy.

The option with a decline in net exports but a rise in the exchange rate does not fit the real appreciation. The options with an expansionary policy or an increase in net exports go the wrong way for an economy that has an inflation problem.

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160.

A positively sloped aggregate supply curve indicates that

A.an increase in aggregate demand will be associated with an increase in the price level and no change in equilibrium output.
B.an increase in aggregate demand will be associated with an increase in both the price level and equilibrium output.
C.an increase in aggregate demand will be associated with an increase in equilibrium output and no change in the price level.
D.none of the above.

Exam Year(s)

UGC NET - 2013,

Answer: B

A positively sloped aggregate supply curve means that an increase in aggregate demand is associated with an increase in both the price level and equilibrium output.

On an upward sloping supply curve a rise in demand moves the economy along the curve to a higher price level and a higher level of output.

With a vertical supply curve output would not change, which is the first option, and with a horizontal curve the price level would not change, which is the third option. Neither is the case with a positive slope.

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