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Macroeconomics Questions and Answers

171.

Given the consumption function, \(C = 0.8Y\), and the investment function \(I = 102 - 0.2i\), then the IS-curve is

Exam Year(s)

UGC NET - 2014,

Answer: C

The IS curve is \(Y = 510 - i\). Goods market equilibrium needs income to equal consumption plus investment:

\[Y = 0.8Y + 102 - 0.2i\]\[0.2Y = 102 - 0.2i\]\[Y = 510 - i\]

The other options come from using a wrong divisor, for example \(Y = 500 - 10i\) would need an investment function with a different slope and intercept, and none of them solves \(0.2Y = 102 - 0.2i\).

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172.

Match the premise given in List - I with that in List - II :

List - IList - II
a. Price expectations are static1. Okun's law
b. Price expectations are adaptive2. Phillips Curve
c. People do not make systematic errors3. Natural Rate of unemployment hypothesis
d. Deviations of output from its natural rate is inversely related to the deviation of unemployment rate from its natural level4. Rational expectations hypothesis

Codes : a b c d

Exam Year(s)

UGC NET - 2014,

Answer: A

The matching is a-2, b-3, c-4, d-1, which is 2 3 4 1. Static price expectations belong to the original Phillips curve. Adaptive expectations lead to the natural rate of unemployment hypothesis (Friedman and Phelps). The rational expectations hypothesis says people do not make systematic errors. The inverse relation between the output deviation from its natural rate and the unemployment deviation from its natural level is Okun's law.

The other codes interchange these four pairs, for example giving Okun's law to static expectations.

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173.

Given that the increment in aggregate demand (Y) per unit of time, t, is given by the equation \[\begin{aligned}\left[\frac{\partial Y}{\partial t}\right]_d \\ = \frac{1}{1-MPC}\cdot\frac{\partial I}{\partial t}\end{aligned}\] and the increment in supply of output is represented by the equation \[\begin{aligned}\left[\frac{\partial Y}{\partial t}\right]_s \\ = \sigma \frac{\partial k}{\partial t}\end{aligned}\] where MPC = Marginal Propensity to Consume, \(\frac{\partial I}{\partial t}\) and \(\frac{\partial k}{\partial t}\) are change in investment and capital stock respectively, per unit of time, then the capacity creating effect or Domar effect of investment following goods market equilibrium equals

Exam Year(s)

UGC NET - 2014,

Answer: A

The Domar capacity effect equals \(\sigma(1 - MPC)\). Equilibrium requires the demand increment to equal the supply increment, and since the change in capital stock per unit of time is investment I:

\[\frac{1}{1-MPC}\frac{\partial I}{\partial t} = \sigma I\]\[\frac{\partial I/\partial t}{I} = \sigma(1 - MPC)\]

This is the rate at which investment must grow to keep capacity and demand matched. The options with \(\frac{1}{1-MPC}\) or \(\frac{1}{\sigma}\) invert one of the terms, and so they do not follow from the two equations.

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174.

When the aggregate supply schedule is positively sloped, continuous increases in the nominal money supply, ceteris parilus, result in

Exam Year(s)

UGC NET - 2014,

Answer: C

With a positively sloped aggregate supply schedule, a rise in the nominal money supply shifts aggregate demand to the right, and the new equilibrium has both a higher price level and higher real output.

A constant price level with proportional output growth needs a horizontal (Keynesian) supply curve. Unchanged output with proportional price rise needs a vertical (classical) supply curve. A fall in real output with higher prices describes stagflation from a supply shock, not a demand expansion.

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