SVKM’s Narsee Monjee Institute for Management Studies

MBA-12 Macroeconomics Midterm Exam

Duration: 90 minutes Total Marks: 85

Instructions (5 minutes):

• Read the question, think, articulate an answer, then write. Your answers must be
concise. Do not ramble.
• You will be evaluated on the basis of the quality, not length of your answer.
• Your answers must be accompanied wherever possible by neat and clearly-labelled
diagrams.
• You can use flow sequences like ↑A →↑B →↓C instead of long text explanations.
• Number your answers correctly, corresponding to the question numbers and sub-
questions in the QP.
• Please send your answers in a single PDF or Word file in a proper paginated
sequence.
• Answer to each of the 5 questions must begin on a new page.
• You can (roughly) allocate 1 minute per mark assigned to each question.

Question 1 (25 marks)

“An unprecedented supply crunch threatens to stymie growth and raise inflation.
It started off with semiconductors and shipping containers and has now spread to coal,
gas and crude oil. Why, even truck drivers are in short supply in the UK, leading to a
massive fuel shortage there. A confluence of many factors --- years of
underinvestment in capacity building, a surge in demand as the world recovers from
the pandemic, the drive to shut down polluting plants in the drive towards green energy
--- was responsible for the crunch.
Indian manufacturing, particularly the auto industry, has also been hit by the chip
shortage … The monsoons have been good and the current account balance is
robust.
In the final analysis, it is the strength of domestic demand that will decide the pace of
the recovery.
In China, Caixing Insight Group’s senior economist Wang Zhe said of the September
manufacturing PMI: ‘“Domestic demand varied based on different types of goods. The
demand for intermediate goods and investment goods was relatively high, while the
demand for consumer goods was weak, reflecting consumers’ lack of purchasing
power’. In India, the forthcoming festive season is therefore critical.”
(Source: Moneycontrol.Com)
a) Based on the above passage and using the AS-AD model flag 3 possible scenarios
that may stall India’s return to robust GDP growth with low to moderate inflation.
Your answer must be accompanied by clear diagrams and concise explanations.
Question 2 (5 marks)
“In 2015, India’s GVA at basic price had grown at 6.1 per cent, while GDP had grown at 7.5
per cent.”
a) How would you reconcile this difference?
b) Which measure is a better to ascertain economic activity at the ground-level? Explain
in a sentence or two.

Question 3 (20 marks)

In designing effective policy responses, much more focus should be on incentives for people
and businesses to invest, produce, and work. On the … fiscal stimulus (after the 2008 Global
Financial Crisis), we should avoid programs that throw money at people and emphasize
instead reductions in marginal income-tax rates—especially where these rates are already
high and fall on capital income.
(Source: Voodoo Multipliers, Robert J. Barro (Harvard U))
a) In the spectrum of macroeconomic schools of thought, where would you place the
author of this passage, Robert Barro, in relation to Keynes?
b) Using clear diagrams (if possible) and well-articulated arguments, present 3 Keynesian
arguments why you may not agree with Barro.

Question 4 (20 marks)

US Consumption function is given as: 1000 + 0.8YD
Private sector investment demand = US$ 2000 billion
Government spending = US$ 2000 billion
Total taxes = US$ 1000 billion
Net exports = US$ – 200 billion (negative 200 billion)
Find equilibrium level of US GDP in billions of $.
Joe Biden has now proposed a plan for the government to spend US$ 3500 billion in
infrastructure projects by raising taxes of US$ 3000 billion and deficit spending the rest.
a) Find the new equilibrium level of US$ GDP.
b) If the government were able to raise an additional US$ 500 billion in taxes (all else
constant), what would be the new equilibrium level of GDP?

Question 5 (15 marks)

In its framework to deal with D-SIBs (Domestically Systemically Important Banks), the Reserve
Bank of India (RBI) defines them as: “banks [that] assume systemic importance due to their
size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness.
The disorderly failure of these banks has the propensity to cause significant disruption to the
essential services provided by the banking system, and in turn, to the overall economic activity.
These banks are considered SIBs as their continued functioning is critical for the uninterrupted
availability of essential banking services to the real economy.”

a) Explain using the two-sector circular flow diagram the importance of SIBs to overall
economic activity.
b) Would you agree that D-SIBs must be bailed-out during a crisis? What are the costs
and benefits of such bail-outs?

- END OF EXAM -