Macroeconomics Questions and Answers

131.

When current income includes negative transitory component, relating consumption with current income will produce

A.an average propensity to consume that is lower than the long run average propensity to consume.
B.an average propensity to consume that is higher than the average long run propensity to consume.
C.an average propensity to consume that equals the long run average propensity to consume.
D.None of the above

Exam Year(s)

UGC NET - 2012,

Answer: B

When current income includes a negative transitory component, measured current income is below permanent income. Consumption depends on permanent income, so it is high relative to that depressed current income, and the average propensity to consume comes out higher than the long run average propensity. Option A describes the opposite situation, a positive transitory component, when current income is unusually high. Option C would hold only if transitory income were zero. Option D is wrong because the permanent income hypothesis gives a definite answer, which is option B.

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132.

Liquidity trap is a situation when

A.all potential investors expect the rate of interest to rise in future
B.all potential investors expect the rate of interest to fall in future
C.natural rate of interest is above the critical rate of interest
D.demand for money for speculative purpose is interest-inelastic

Exam Year(s)

UGC NET - 2012,

Answer: A

A liquidity trap is a situation in which all potential investors expect the rate of interest to rise in future. At a very low interest rate bond prices are high and are expected to fall, so everyone prefers to hold money, and any extra money supply is simply absorbed into idle balances without lowering the interest rate further. Option B is wrong because an expected fall in the rate would make people buy bonds, not hoard money. Option C mixes up the natural rate with the Keynesian critical rate. Option D is wrong because in a liquidity trap the speculative demand for money is perfectly interest elastic, not inelastic.

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133.

Which of the following is not a feature of the A.W. Phillip's inflation-unemployment trade-off relation ?

A.A non-linear inverse relationship between unemployment rate and the rate of exchange in wage rate.
B.There is a loop in the anti-clockwise around the Phillip's curve.
C.The wage-inflation unemployment relationship is predictable.
D.Philip's curve shifts when expected rate of inflation shifts

Exam Year(s)

UGC NET - 2012,

Answer: D

The statement that is not a feature of the original Phillips relation is that the curve shifts when the expected rate of inflation shifts. That result comes from the later expectations augmented Phillips curve of Friedman and Phelps, and Phillips's own 1958 relation did not include it. Options A, B and C are features of the Phillips analysis: a non-linear inverse relation between unemployment and the rate of change of money wages, loops around the curve in the anti-clockwise direction in the cyclical movement, and a wage-inflation and unemployment relation that was taken as stable and predictable. Option D is therefore the one to pick for a not-a-feature question.

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134.

Suppose there is full employment and vertical aggregate supply schedule. An increase in the nominal money supply

A.reduces the rate of interest and changes the composition of output
B.causes a proportional increase in real output
C.has no effect on the real money supply or the composition of output
D.causes the real money supply to increase, which changes composition of output

Exam Year(s)

UGC NET - 2012,

Answer: C

With full employment and a vertical aggregate supply schedule, output cannot rise, so a larger nominal money supply only raises the price level in proportion. The real money supply, nominal money divided by the price level, stays the same, and so does the composition of output. This is the classical neutrality of money, option C. Option A is wrong because with real balances unchanged the interest rate does not fall and the composition does not change. Option B is wrong because output is fixed at full employment. Option D is wrong because the rise in prices exactly offsets the increase in nominal money.

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135.

Core inflation is a measure of inflation

A.that is based only on food and energy prices
B.that includes items that face volatile price movements, notably food and energy
C.that excludes items that face volatile price movements, notably food and energy
D.None of the above

Exam Year(s)

UGC NET - 2012,

Answer: C

Core inflation is a measure of inflation that excludes items facing volatile price movements, notably food and energy. It is used by central banks to see the underlying trend, because temporary supply shocks to food and fuel move the headline index without reflecting the stance of demand. Option A is wrong because it describes the opposite, a measure based only on food and energy. Option B is wrong because it includes the volatile items. Option D is wrong because the definition is given in option C.

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136.

Assertion (A) : Compared to the individual supply curve, the aggregate supply curve is more elastic.

Reason (R) : There is the possibility of moving between being out of the labour force and being in the labour force. Choose amongst the following the correct answer.
Codes :

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

Exam Year(s)

UGC NET - 2013,

Answer: B

(A) is correct, but (R) is not the correct explanation of (A), as the key gives it. The aggregate supply curve of labour is more elastic than the individual's, because the movement of people into and out of the labour force adds to the response of the total supply, so the assertion is correct. The reason states a real feature of the labour market but does not give the main explanation, which is the aggregation of the different reservation wages of individuals, so the key treats it as a related fact and not the explanation. Options 2, 3 and 4 differ on that and are rejected.

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137.

The negative relationship between the gap between actual GDP and its trend value and the difference between actual unemployment rate and its equilibrium value is called

A.The Aggregate Supply Curve
B.The Phillips Curve
C.The Natural Rate of Unemployment Hypothesis
D.Okun's Law

Exam Year(s)

UGC NET - 2013,

Answer: D

The negative relationship between the gap of actual GDP from its trend value and the difference between the actual unemployment rate and its equilibrium value is Okun's Law. It states that when output falls below its potential, the unemployment rate rises above its natural rate, and in the usual statement a one point rise in unemployment goes with a fall of about two points in GDP relative to potential. The Phillips curve relates inflation to unemployment, the aggregate supply curve relates the price level to output, and the natural rate hypothesis concerns the long run equilibrium unemployment, so none of them is the relation described.

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138.

It is often true that as the economy begins to recover from a recession, the unemployment rate rises because

A.as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls.
B.as the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again.
C.as the economy begins to recover from a recession because of the errors in the way the data are collected.
D.as the economy initially recovers from a recession, firms do not immediately increase the number of workers they hire. Firms wait to hire more individuals until they are convinced that the recovery is strong.

Exam Year(s)

UGC NET - 2013,

Answer: B

The key accepts the second option, that workers who were discouraged about finding a job begin to look for work again. A person who has stopped looking is not counted in the labour force, and when the recovery starts such people re-enter the labour force and are counted as unemployed until they find jobs, so the unemployment rate can rise at the start of a recovery. The first option is wrong because the demand for goods rises in a recovery, and the third blames the errors of data collection, which is not an economic explanation. The fourth option, that firms are slow to hire, is also a feature of recoveries, but the key does not accept it.

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139.

When additional government expenditure is financed by selling government securities, then what will be the nature of crowding out effect, given in List - I in the context of the situation given in List - II ?

List - I Crowding out effect	List - II Situation
a. Full	1. Keynesian Range
b. Partial	2. Classical Range
c. Nil	3. Intermediate Range

Codes : a b c

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

Exam Year(s)

UGC NET - 2013,

Answer: A

The correct match is a-2, b-3, c-1. Crowding out is full in the classical range, where the LM curve is vertical and any rise in government borrowing displaces an equal amount of private spending. It is partial in the intermediate range, where the LM curve slopes upwards, and nil in the Keynesian range, where the LM curve is flat and interest rates do not rise. This is the first option, and the other three options give the full effect to the intermediate or Keynesian range, which contradicts this.

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140.

A major portion of the multiplier effect is realized in fewer periods when marginal propensity to consume is

A.unity
B.larger
C.smaller
D.none of the above

Exam Year(s)

UGC NET - 2013,

Answer: C

The multiplier is realised in fewer periods when the marginal propensity to consume is smaller. With a small MPC, each round of spending is a small fraction of the last, so the sequence of respending dies out quickly and most of the total effect is reached in the first few periods.

With an MPC of unity or a large MPC, each round is nearly as big as the last, so the effect takes many periods to be realised. The option 'none of the above' is therefore wrong.

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