CHRIST (DEEMED TO BE UNIVERSITY),BENGALURU - 560029

End Semester Examination March - 20 18

Bachelor of Arts II SEMESTER
Code: ECO231 Max.Marks: 10 0
Subject: PRINCIPLES OF MACROECONOMICS Duration: 3Hrs
SECTION A
Answer any 10 questions 10 X2=20
1 Mr. Ryan receives his pension – what is the immediate effect on India’s GDP?
2 Differentiate between nominal and real interest rate.
3 If your deposit earns 10%, what is the impact on your purchasing power under zero
inflation?
4 What is the notion of monetary neutrality?
5 What is Fisher effect?
6 Define money multiplier.
7 Define automatic stabilizers.
8 According to the theory of liquidity preference, which variable adjusts to balance
the supply and demand for money – interest rate or money supply?
9 Define the multiplier effect.
10 Define supply shock.
11 Define GDP.
12 State the quantity equation and name its components.
SECTION B
Answer any 6 questions 6X8=48
13 Suppose that a borrower and a lender agree on the nominal interest rate to be paid
on a loan. Then inflation turns out to be higher than they both expected.

1. Is real interes t rate on this loan higher or lower than expected?

2. Does the lender gain or los e from this unexpectedly high
inflation? Does the borrower gain or los e?
3. How does this affect homeowners who obtained fixed rate home
loans before the s tart of the inflationary period?
4. How did it affect the banks that lent money?

14 Which of the problems in the construction of the CPI might be illustrated by each of
the following situations?

1. The invention of Sony Walkman.

2. The introduction of air bags in cars .
3. Increas ed pers onal computer purchas es in res pons e to a decline
in their price.
4. More s coops of rais ins in each package of Baggary Oats .

15 What constitutes the demand and supply of loanable funds? How do government
budget deficits or surpluses impact the market for loanable funds?
16 Explain the difference between saving and investment as defined by a
macroeconomist. Which of the following situations represent investment and which
represent savings? Explain.

1. Your family takes out a mortgage and buys a new hous e.

2. You us e your Rs . 5000 paycheck to buy s tock in Infos ys .
3. Your roommate earns Rs 1000 and depos its it in her account at a
bank.
4. You borrow Rs 500000 from a bank to buy a car to us e in your
 pizza delivery bus ines s .

17 What are the key facts about economic fluctuations? What assumptions did Classical
economists make to explain short run fluctuations?
18 List and explain the three theories for why the short run aggregate supply curve is
upward sloping.
19 How is the model of Phillips curve related to the model of aggregate demand and
aggregate supply?
20 What are the two situations in which most economists view a budget deficit as
justifiable? What are the arguments in favour of balanced budget?
SECTION C
Answer any 2 questions 2X16=32
21 Throw some light on the social costs of inflation and check their relevance in Indian
context. Discuss in detail how inflation is like a tax.
22 Use the theory of liquidity preference to explain the downward slope of the
aggregate demand curve and check how a decrease in money supply affects the
aggregate demand curve.
23 Suppose the central bank of the country decides to reduce inflation. Use the Phillips
curve to show the short run and long run effects of this policy. How might be the
short run costs be reduced?