Macroeconomics Questions and Answers

Q: If the nominal money supply grows by 4% per year, velocity is constant and the real GDP grows by 1% per year, inflation would be ................ .

Inflation would be 3%.The quantity equation MV = PY in growth rates gives:\[ \begin{aligned} \%\Delta M + \%\Delta V &= \%\Delta P + \%\Delta Y \\ 4 + 0 &= \pi + 1 \\ \pi &= 3\% \end{aligned} \]Money grows by 4% and velocity is constant, so nominal GDP grows by 4%; with real output growing 1%, prices must rise by 3%. Taking 4% ignores real growth, and 1% confuses the growth of output with inflation.

Q: In the equation C = a + bY describing the aggregate consumption function, a stands for :

In C = a + bY, a is the amount of consumption when income is zero.The intercept a is autonomous consumption: the spending people undertake even with no income, financed by past savings or borrowing. It is where the consumption function cuts the vertical axis.The slope b is the marginal propensity to consume, the share of each extra rupee of income that is consumed. The marginal propensity to save is 1 - b. There is no 'maximum income' in the function; consumption rises steadily with income.

Q: Classical economists argued that money is neutral because ............. .

Classical economists held money neutral because prices adjust quickly to a monetary expansion.In the classical model, prices and wages are fully flexible. An increase in the money supply raises the price level in proportion, leaving real variables such as output, employment and the real interest rate unchanged. Money affects only nominal values, which is what neutrality means.Slow-adjusting or fixed prices in the short run (B, C) are Keynesian assumptions and are the reason money can affect output. Adjustment only in the long run (A) describes the modern view that money is neutral in the long run but not in the short run.

Q: As Marginal Propensity to Save (MPS) increases, the value of multiplier would :

As MPS increases, the multiplier would fall.The simple investment multiplier is the reciprocal of the marginal propensity to save:\[ k = \frac{1}{1 - MPC} = \frac{1}{MPS} \]A larger MPS means more of each round of extra income leaks into saving, so less is re-spent and the total expansion is smaller. For example, an MPS of 0.2 gives k = 5, while 0.25 gives k = 4. The multiplier does not rise, stay constant or depend on the size of the investment change.

Q: What happens if the injections are less than the leakages at full employment level of national income ?

The result is a Deflationary Gap.At the full-employment level of income, if injections (investment, government spending, exports) are less than leakages (saving, taxes, imports), aggregate demand falls short of full-employment output. The shortfall is the deflationary gap; income falls below full employment and unemployment results.An inflationary gap is the opposite case, with injections exceeding leakages at full employment. Equilibrium requires injections to equal leakages. Hyper-inflation is extremely rapid inflation, not a result of deficient demand.

Q: What does the term 'Gross Investment' mean while denoting a nation's economy ?

Gross Investment = Net Investment + Depreciation.Gross investment is the total spending on new capital goods in a period. Part of it only replaces capital worn out during the period, which is depreciation (consumption of fixed capital); the rest adds to the capital stock and is net investment. So gross investment is net investment plus depreciation.Option B subtracts depreciation, which gives a figure below net investment. Option C reverses the relationship, and option D adds savings, a different concept, to depreciation.

Q: Who among the following advocated and active fiscal policy to reduce unemployment ?

It was advocated by the Keynesian economists.Keynes argued that unemployment comes from deficient aggregate demand, which the economy may not correct by itself. Government spending and tax cuts raise demand, and through the multiplier, output and employment. Active fiscal policy is therefore central to Keynesian economics.Classical economists believed markets clear and Say's law holds, so they saw no need for fiscal intervention. Monetarists stress stable money growth and doubt the power of fiscal policy, so 'both' and 'monetarist' are also wrong.

Q: According to Okun's law, 1 extra point of unemployment costs ......... percent of GDP.

The answer is 2% of GDP.Okun's law relates unemployment to lost output: in its standard textbook form, each percentage point of unemployment above the natural rate is associated with about 2% of GDP below potential. Okun's own 1962 estimate for the United States was closer to 3%, but the 2% rule of thumb is the one used in modern macroeconomics texts and the key follows it.6% and 1% are not associated with the law.

Q: Principles of Supply-side Economics focus on .................... .

Supply-side economics focuses on shifting AS curve to the right.Supply-side economics holds that growth is best achieved by raising the economy's productive capacity: lower marginal tax rates, deregulation and incentives to work, save and invest increase aggregate supply. A rightward shift of AS raises output while easing price pressure.Shifting AD is the Keynesian demand-management route. Shifting AS to the left would mean lower capacity and higher prices, the opposite of the aim.

81.

If the nominal money supply grows by 4% per year, velocity is constant and the real GDP grows by 1% per year, inflation would be ................ .

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

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: C

Inflation would be 3%.

The quantity equation MV = PY in growth rates gives:

\[ \begin{aligned} \%\Delta M + \%\Delta V &= \%\Delta P + \%\Delta Y \\ 4 + 0 &= \pi + 1 \\ \pi &= 3\% \end{aligned} \]

Money grows by 4% and velocity is constant, so nominal GDP grows by 4%; with real output growing 1%, prices must rise by 3%. Taking 4% ignores real growth, and 1% confuses the growth of output with inflation.

Discuss in Forum

82.

In the equation C = a + bY describing the aggregate consumption function, a stands for :

A.The amount of consumption when income is zero
B.Marginal propensity to consume
C.The amount of consumption when the income is maximum
D.Marginal propensity to save

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: A

In C = a + bY, a is the amount of consumption when income is zero.

The intercept a is autonomous consumption: the spending people undertake even with no income, financed by past savings or borrowing. It is where the consumption function cuts the vertical axis.

The slope b is the marginal propensity to consume, the share of each extra rupee of income that is consumed. The marginal propensity to save is 1 - b. There is no 'maximum income' in the function; consumption rises steadily with income.

Discuss in Forum

83.

Classical economists argued that money is neutral because ............. .

A.Prices adjust to a monetary expansion only in the long-run
B.Prices are slow to adjust to a monetary expansion
C.Prices are fixed in the short-run
D.Prices adjust quickly to a monetary expansion

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: D

Classical economists held money neutral because prices adjust quickly to a monetary expansion.

In the classical model, prices and wages are fully flexible. An increase in the money supply raises the price level in proportion, leaving real variables such as output, employment and the real interest rate unchanged. Money affects only nominal values, which is what neutrality means.

Slow-adjusting or fixed prices in the short run (B, C) are Keynesian assumptions and are the reason money can affect output. Adjustment only in the long run (A) describes the modern view that money is neutral in the long run but not in the short run.

Discuss in Forum

84.

As Marginal Propensity to Save (MPS) increases, the value of multiplier would :

A.Increase
B.Increase or decrease depending upon the size of change in investment
C.Remain constant
D.Fall

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: D

As MPS increases, the multiplier would fall.

The simple investment multiplier is the reciprocal of the marginal propensity to save:

\[ k = \frac{1}{1 - MPC} = \frac{1}{MPS} \]

A larger MPS means more of each round of extra income leaks into saving, so less is re-spent and the total expansion is smaller. For example, an MPS of 0.2 gives k = 5, while 0.25 gives k = 4. The multiplier does not rise, stay constant or depend on the size of the investment change.

Discuss in Forum

85.

What happens if the injections are less than the leakages at full employment level of national income ?

A.Inflationary Gap
B.Equilibrium
C.Hyper-inflation
D.Deflationary Gap

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: D

The result is a Deflationary Gap.

At the full-employment level of income, if injections (investment, government spending, exports) are less than leakages (saving, taxes, imports), aggregate demand falls short of full-employment output. The shortfall is the deflationary gap; income falls below full employment and unemployment results.

An inflationary gap is the opposite case, with injections exceeding leakages at full employment. Equilibrium requires injections to equal leakages. Hyper-inflation is extremely rapid inflation, not a result of deficient demand.

Discuss in Forum

86.

The price of money next year in terms of money, this year is expressed as .................. .

A.1 + real interest rate
B.1 + nominal interest rate
C.\(\dfrac{1}{1 + \text{real interest rate}}\)
D.\(\dfrac{1}{1 + \text{nominal interest rate}}\)

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: D

The price of next year's money in terms of this year's money is 1 / (1 + nominal interest rate).

One rupee invested today at nominal rate i grows to (1 + i) rupees next year. So one rupee next year is worth 1/(1 + i) rupees today: this discount factor is the price, in today's money, of a rupee delivered next year.

1 + i (B) is the reverse, the price of this year's money in terms of next year's. The real interest rate (A, C) converts goods across time, not money, so it is not the right rate here.

Discuss in Forum

87.

What does the term 'Gross Investment' mean while denoting a nation's economy ?

A.Gross Investment = Net Investment + Depreciation
B.Gross Investment = Net Investment - Depreciation
C.Gross Investment = Depreciation - Net Investment
D.Gross Investment = Depreciation + Savings

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: A

Gross Investment = Net Investment + Depreciation.

Gross investment is the total spending on new capital goods in a period. Part of it only replaces capital worn out during the period, which is depreciation (consumption of fixed capital); the rest adds to the capital stock and is net investment. So gross investment is net investment plus depreciation.

Option B subtracts depreciation, which gives a figure below net investment. Option C reverses the relationship, and option D adds savings, a different concept, to depreciation.

Discuss in Forum

88.

Who among the following advocated and active fiscal policy to reduce unemployment ?

A.The classical
B.The Keynesian
C.Both classical and Keynesian
D.Monetarist

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: B

It was advocated by the Keynesian economists.

Keynes argued that unemployment comes from deficient aggregate demand, which the economy may not correct by itself. Government spending and tax cuts raise demand, and through the multiplier, output and employment. Active fiscal policy is therefore central to Keynesian economics.

Classical economists believed markets clear and Say's law holds, so they saw no need for fiscal intervention. Monetarists stress stable money growth and doubt the power of fiscal policy, so 'both' and 'monetarist' are also wrong.

Discuss in Forum

89.

According to Okun's law, 1 extra point of unemployment costs ......... percent of GDP.

A.2%
B.6%
C.1%
D.3%

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: A

The answer is 2% of GDP.

Okun's law relates unemployment to lost output: in its standard textbook form, each percentage point of unemployment above the natural rate is associated with about 2% of GDP below potential. Okun's own 1962 estimate for the United States was closer to 3%, but the 2% rule of thumb is the one used in modern macroeconomics texts and the key follows it.

6% and 1% are not associated with the law.

Discuss in Forum

90.

Principles of Supply-side Economics focus on .................... .

A.Shifting AS curve to the right
B.Shifting AD curve to the right
C.Shifting AS curve to the left
D.Shifting AD curve to the left

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: A

Supply-side economics focuses on shifting AS curve to the right.

Supply-side economics holds that growth is best achieved by raising the economy's productive capacity: lower marginal tax rates, deregulation and incentives to work, save and invest increase aggregate supply. A rightward shift of AS raises output while easing price pressure.

Shifting AD is the Keynesian demand-management route. Shifting AS to the left would mean lower capacity and higher prices, the opposite of the aim.

Macroeconomics Questions and Answers

Topics

Other Subjects

Tags: Macroeconomics Questions and Answers

About Us

Macroeconomics Questions and Answers

Topics

Other Subjects

Tags: Macroeconomics Questions and Answers

About Us

Stay informed about all important Dates & Notifications