SEMESTER : 2 Unique Paper Code : 2272201201 - | JULY Paper : Introductory Macroeconomics Course : B.A, (Prog.) Economies I Year 2023 (Major and Non-Major) (DSC) : »Duration ; 3 Hours Maximum Marks : 90 Attempt any six questions, All questions carry equal marks, Q. 1. Explain the fol i) business cycle, (ii) inflation and deflation, (ii) stagflation, (iv) positive analysis and normative analysis, (0) trade deficit and trade surplus. Ans. () Business Cycle: The business cycle refers to the recurring pattern ofeconomic growth and contraction in an economy over time. It typically consists of four phases: expansion, peak, contraction, and trough. During the expansion phase, the economy grows, employment increases, and businesses thrive. At the peak, the economy Teaches its highest point before starting to contract. | Contraction is characterized by declining economic activity, job losses, and ‘reduced spending. Finally, the trough marks the lowest point before the cycle starts over again. lowing: (i) Inflation and Deflation : Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. It means that your money's purchasing power decreases, money to buy the same things. : Deflation : On the other hand, is the opposite. It's a sustained decrease in the general price level, which means your money's purchasing power increases, but it can lead to reduced spending and economic problems. (ii) Stagflation : Stagflation is an economic condition where an economy experiences both’stagnant growth (high unemployment) and high inflation simultaneously. This is a challenging situation for policymakers because traditional tools to combat inflation, like raising interest rates, can worsen unemployment, and efforts to reduce unemployment, like increasing government spending, can exacerbate inflation. (iv) Positive Analysis and Normative Analysis : Positive analysis is a type of economic analysis that deals with objective, factual statements about how the economy works. It seeks to describe and explain economic phenomena asthey are, without making value judgments. Normative analysis, on the other hand, involves making value judgments and offering subjective opinions about how the economy should work or what policies should be implemented. (») Trade Deficit and Trade Surplus : A trade deficit occurs when a ‘ountry’s imports (goods and services purchased from other countries) exceed US exports (goods and services sold to other countries). This results in a negative (149) and you need more~_— AMAN:B.A. (Prag) Beonomts {Year [Semester ~ 1) ‘balane oftrade In contrast a trade surplus occurs when a county, NRADE its imprta leading to a positive balance of trade. A trade g_2Pa] Riise that county isiemporting mare than it’s exporting, which may) ite cconomy and balance of payments A trade surplus eggests that a se eeaettag more than ite importing, which can ave its own econ Frictions 'Q.2 Discuss the ditferént approaches to measuring Gross Dome, Product. “Ans.Gress Domestic Product (GDP) is a key economic indicator measures the total econsmic output ef aunty. "There are dure pray aphronehes to measuring GDP, each provid Aiternt perepoctive on am econemy: {@) Preductios Approach (Outpat oF Value-Added Approach) + approseh ealealates GDP by summing the valueadded at each stage phate tn en economy. Valsadded i he diferenco between the value Foods and services produced sod the value of intermediate inpule sed Erodace themit fesaees ou the production process and accounts fort ontrbutin ofeach ser or ingustry GDP. {Gi Income Approach :Theincome approach calculates GDP by sumniog sll thelneomesearced wits an econ Sha pratitalt reflects the income detibstion nd compensetio to actors production, suth ae labor and capital (Gib Expenditure Approach "Tae expenditere approach calclates GI by summing all the expenditures made oa final goods and eevices within Lonony. vie represented by theequation: CDP=C + T+ G+ OM), wherg (Etaprecents consumer spending oo gods and services represents avestne «in epital goods, lke machinery asd ba ponding. = M) represent net experts where lathe ¥ isthe value of ports This approach lscommenly wed an Households businstes, ond the geveramont contribute oan ceonamy'overal Tes mportant to note that al ree approaches should theoretically sit the same GDP valu when properly mearred. However, practice, some Etterentes may arse G00 to statistical dsrepansies, measurement error SEPSins futon Natond tatitial agencieseton use u combination of thse sreeindhee to caleslate and validate CDP figures to ensure accuraey. ‘Muitionlly, tere are tive ODP variants Nominal ODP, Real GDP, and Per Ciplts GDP. ach serving speule porpses euch ax aecounting for falation er ‘measuring GDP per poreen '@..(a) Why do we call echaatams such as Proportional Income ‘Tar and theWelaresyeien sutomade Stabilizers? Choose one of these mechanisms id why Ht affects acts in output “Aue, Fropzrtional Income Tax and Ube Welfr System are often refered to “automate Habilzers” because they help stabilize an economy deg "Pie tneludes wages rents interest, Introductory Macronconomics-2023 1st [periods of economic fluctuation without requiring active intervention from Elmar thse mcanons wnt asneesiy is ropone ange Belem condos hefogo whet npsc ef cotone Sovmtone rar Taratraton he Were Sytem at anatomic sale an xsi how and winy i aflecafuctuations in economic output: ae Saar Sytem an anton Sie theyre Natar he sens sce ie ads pra is sezpaloment tc ase ohana mioerpand sng ec entre wean canannaon oct Se can are adan ad Senate aie ree aes oc eee ee rita Diner nd Copeeppionaciatr Brrr tama een ieudntbas sa nets toe patton mana eane ten {oie to maintain their income levels od purchasing pores: Thi arn, ufportsconsmer spending and evens a sharp dectineiaeggrepate demand. people have some financial security trough thse beat they a7 itely to continue spending on essential guadn end herve ca it ms erty during economic dont pacer Go) Reducing Net eosaniedowaturnscan eifad to reduced consumer SSS closures and Job losses iy iabiising incomes and maintaining same evel of consumer spending, sin Phfate system can brea his negative feedback lop end mitigate the i ed duration of recession Tn mary, the welly este pean oa eto hii “arn Tart economic downturns potiding income support aban rain igting poverty, and reducing negative ferdbck open he a ng, iebelpa to moderate to seve of eonanie Duckutens ee a economie stability without requiing diveretonary policy ‘ona fom the government se reppoce the consumption function Is given by C = 100 +08 Y ‘ilps government while iavestment ix given by I= 80- id weat fe the equilibrium lovel of income in this ease? {iy what ia the lovel of naving in equilibrium ? {id 1, for vomie reanom output is atthe level of 800, ltelovel of involuntary inventory accumulation be? atea 2023 19 and saving linked? eo __AMAR:DA (Frog) Broome fens Sementer <1 ATs to euler fiom eaten cau, “nd Ann ef te eit ery acute, We £28 Ey sales oa toncon and averse ae ston enn pen pean oatpa) euals tal eperdngt, | is RUNES eoding cones of consurrion (©) and nesses | Ihe ed st eres between sone) Introductory Mocroeconor QT) Given income, how are consumpt what is the basie motivation for saving? wing: Consumption and saving are two Key ancl belnvor. They 82 components ofan individual's on eee tse pa aan or evesten: purpose. They speculate om || Seo e sot rma ta ln ri Puan rane oN 8 Tope 41-13 Analees PASS No, 77-18) Sa tue tay may race Chir meny nding a eer fitret= rollowio ae fap the following: i 1 Saving Function. Beering uts. itu Techaologteal Changes Advarcements in payment tchnologiet, cudh a Ueerons transferase gta! currencies can infloence the demand ‘Di pnyelea cash and ebwckngnecount balances. ‘oii Regulations and Pole raqaremensforbares and menetary policy action FSRSSU aoe tbe demand for money im an eonomy. wi) low the change in fiscal palleyeffectacon the equilibria of income? Explais using diagram. ‘has See Q No. 8, Topler4 IS-LM. JPET Wat ational wealth, and why tet Important? How I natitnai wealth inked to national savings? 2 Gancumption Function an En er hancins Coa iceman tet anos once “ena antennas coniaiag pennies rcp coz wi te “Tie consumption function helps economists understand how changes in nme in ee crm nero yo the toal fa county a ae veil erate, eeiSttcs, and latelleetal property. National wealth is importat fer several Teo: crcomoute Well-being: National wealdhisa reflection ofthe cone eae aya reidcte It india th country ably to provide othe needs ad dosizes of ita cizens “tp Standard of Living +A higher national wealth can cotta ) Standen’ fing fr the population. t can provide resources for be! aaa tgealthcar,nimstructure, aad overall guaity of ie, famous Contomption ‘This th level of consump “Teen Cnsoion consumption that occurs setlnwo repost bononamtien nadia ort open fo Conse (PC: The MEC isthe change in ‘velba er escae ingen rather an avea158 AMAR : B.A. (Prog.) Economics I Year [Semester — II] Gi) Saving Function: The saving function is complementary ty th consumption function. It describes the relationship between saving ayy disposable income. : It is represented as S =AY,), where Sis saving, and Y,,is disposable income, ‘The saving function helps us fo understand how saving behavior is influencg by changes in income. The saving function can be divided into two component, ‘Autonomous Saving : This is the level of saving that occurs even whey income is zero. It represents the basic saving that individuals do. Marginal Propensity to Save (MPS) : The MPS is the change in saving for every one-unit change in disposable income. It reflects how much of an additional dollar of income is saved rather than spent. (ii) GDP Deflator : The GDP Deflator is a price index used to measure the average change in prices of all new goods and services included in a country's Gross Domestic Product (GDP). It is a broad measure of the price level and is calculated as follows: GDP Deflator = (Nominal GDP / Real GDP) x 100 Nominal- GDP : This is the GDP calculated at current market prices, without adjusting for inflation. : Real GDP : This is the GDP calculated after adjusting for inflation. It measures economic output using constant prices from a base year, which allows for a comparison of output across different time periods. The GDP Deflator is important because it helps economists and policymakers understand the extent to which changes in nominal GDP are due to changes in actual production (real GDP) or due to changes in prices. It serves as an indicator of overall inflation or deflation in an economy. (iii) The Desired Capital Stock and the User Cost of Capital : Desired Capital Stock : The desired capital stock represents the optimal or desired level of capital goods (such as machinery, equipment, and structures) that a firm or business wants to have to maximize its production and profitability. The desired capital stock is determined by various factors, including the expected return on investment, the cost of capital, technological advancements, and the firm’s production needs. Firms aim to reach their desired capital stock to operate efficiently and achieve their production goals. User Cost of Capital : The user cost of capital is the total cost associated with using and maintaining a capital asset. It includes both the explicit cosls (e.g., depreciation, interest on loans to purehase capital) and the opportunily costs (e.g., foregone interest on other potential investments). The user cost of capital is a crucial concept for businesses when deciding whether to invest in new capital equipment or maintain existing assets. helps firms assess the profitability of investing in additional capital goods a04 guides their decision-making regarding capital expenditures, @oAme