1.

The following relationships are given for an economy: Goods market equilibrium Money market equilibrium Exports Import function The trade balance at equilibrium in the economy is (a) (c) (e) 637.5 MUC (surplus) (b) 667.5 MUC (surplus) 687.5 MUC (deficit) (d) 687.5 MUC (surplus) 768.5 MUC (deficit). 0.5Y = 2,925 37.5i 0.25Y = 312.5 + 125i 650 MUC 25 + 0.25Y

2. The following relations are estimated for an economy: (All macroeconomic aggregates are in million units of currency (MUC) and the rate of interest is in percentage.) Consumption function Investment function Government Expenditure Exports Import function Money Supply Transaction Demand for Money Speculative Demand for Money The equilibrium level of income would be (a) 5,000 MUC (d) 6,550 MUC (b) 5,500 MUC (e) 7,000 MUC. (c) 6,000 MUC (C) (I) (G) (E) (M) (Ms) (Mt) (Ma) = = = = = = = = 510+ 0.455Y -10i 300 + 0.15Y 50i 1,200 900 50 + 0.105Y 1,000 0.25Y 350 100i

3. The following data is extracted from the balance of Payments statistics of a country for the year 2005: Particulars Merchandise imports Merchandise exports Software exports Software imports Earnings on loans and investments abroad Earnings on loans and investments in the country by foreigners Private remittances to abroad Private remittances from abroad What is the current account balance for the year 2005? (a) 1,350 MUC (Cr.) (c) 1,650 MUC (Dr.) (b) 1,650 MUC (Cr.) (d) 1,350 MUC (Dr.) (e) 2,000 MUC (Dr.). MUC 20,000 18,000 16,000 12,000 400 1,000 200 150

5. The following relations are derived for an economy. (All macro aggregates are in million units of currency and interest in term of percent per annum) Savings function (S) Disposable Income (Yd) Transfer payments (R) Tax function (T) Investment function (I) Exogenous Government Expenditure (G) Imports (M) Exports (E) 30 + 0.3Yd YT+R 40 0.2Y 400 10i 300 20 + 0.2Y 250

Transaction demand for money (Mt/P) Speculative Demand for money (Ma/P) Money supply (Ms/P) Trade balance and budget deficit at equilibrium are (a) 63.28 MUC and 47.72 MUC respectively (b) 62.28 MUC and 47.72 MUC respectively (c) 62.28 MUC and 47.72 MUC respectively (d) 64.28 MUC and 47.72 MUC respectively (e) 62.28 MUC and 57.72 MUC respectively.

0.3Y 125 50i 300

6. The balance of payments of a country for the year 2003 is given below. Particulars Merchandise imports Merchandise exports Software exports Software imports Earnings on loans and investments abroad Earnings on loans and investments in the country by foreigners Private remittances to abroad Private remittances from abroad Government loans to abroad Government loans from abroad Direct investments abroad Foreign direct investment in the country Short-term loans and investments abroad MUC 50,000 45,000 40,000 30,000 1,000 2,500 500 375 75 50 25 375 500

Foreign short-term loans and investments in the country

What is the current account balance for the year 2003? (a) 3,375 MUC (Cr.) (b) 3,375 MUC (Dr.) (c) 4,125 MUC (Cr.) (d) 4,125 MUC (Dr.)

100

(e) 4,875 MUC (Cr.).

Answer : (c) Reason : Goods market equilibrium: 0.5Y = 2,925 37.5; or, Y = 5,850 75i (IS Function) Money market equilibrium: 0.25Y = 312.5 + 125; or, Y = 1,250 + 500i (LM function) At simultaneous equilibrium of goods market and money market, IS = LM 5,850 75i = 1,250 + 500i or, 575i = 4,600 or, i = 8% Y = 5,850 75(8) = 5,850 600 = 5,250 Trade balance at equilibrium =EM = 650 (25 + 0.25Y) = 650 25 .25 (5,250) = 650 25 1,312.50 = 687.50 MUC (deficit) 2. Answer : (a) Reason : IS function Y = C + I + G + (E M) = 510 + 0.455Y 10i + 300 + 0.15Y 50i + 1200 + 900 50 0.105Y Y = 2860 + 0.5Y 60i Y = LM function Ms = Md = = 1000
2860 60i 0.5 = 5720 120i

IS functions

Md Mt + M a 0.25Y + 350 100i = 0.25Y + 350 100i

650 100i 0.25 = 2600 + 400i

Y = At equilibrium LM = IS 2600 + 400i = 5720 120i 520i = 3120 i = 6% Y

LM function

5000.

3. Answer :

(a)

Reason : Current account balance = Merchandise exports Merchandise imports + Software exports Software imports + Earnings on loans and investments abroad Earnings on loans and investments by foreigners + Private remittances from abroad Private remittances to abroad = 18000 20000 + 16000 12000 + 400 1000 + 150 200 = 1350 Cr. 5. Answer : (a) Answer : (b) Reason : Goods market will be in equilibrium when: Y = C+I+G+EM Given savings function (S) = 30 + 0.3Yd Consumption function (C) = 30 + 0.Yd Y = 30 + 0.7Yd + 400 10i + 300 + 250 (20+0.2Y) = 30 + 0.7(0.8Y + 40) + 400 10i + 300 + 250 20 0.2Y = 988 + 0.36Y 10i 0.64Y = 988 10i Y = 1543.75 15.63i Money market will be in equilibrium when supply of money = demand of money 300 = 0.3Y + 125 50i 0.3Y = 175 50i Y = 583.33 + 166.67i Equating IS and LM curve: 1543.75 15.63i = 583.33 + 166.67i On solving the equation we get i = 5.27 Substituting in IS curve Y = 1543.75 (15.63*5.27) = 1461.38 Trade balance at Equilibrium = E M = 250 20 0.2Y = 230 292.28 = 62.28 Budget Deficit = Government Expenditure taxes + transfer payments = 300 292.28 + 40 = 47.72