SVKMs NMIMS

Anil Surendra Modi School of Commerce

Programme: BBA/B.Com. (HONOURS)/B. Sc. (FINANCE)
Year: I/Semester II (Exam Year: 2023-2024)

Subject: Macroeconomics
Date: 11 May 2024 Time: 03:00 pm - 05:00 pm (02:00 Hrs.)
Max Marks: 50
FINAL EXAMINATION(2023-2024)

Instructions:
1. This question paper contains 4 pages
2. Answer to each new question to be started on a fresh page.
3. Figure in right hand side indicates full marks
4. Question number 1 is compulsory
5. Attempt any eight questions from question number 2A to 2I

1. The coronavirus crisis in the United States—and the associated business closures, event 10
cancellations, and work-from-home policies—triggered a deep economic downturn. The
Federal Reserve stepped in with a broad array of actions to keep credit flowing to limit the
economic damage from the pandemic. These included large purchases of U.S. government
and mortgage-backed securities and lending to support households, employers, financial
market participants, and state and local governments. “We are deploying these lending powers
to an unprecedented extent [and] … will continue to use these powers forcefully, proactively,
and aggressively until we are confident that we are solidly on the road to recovery,” Jerome
Powell, chair of the Federal Reserve Board of Governors, said in April 2020. The Fed cut its
target for the federal funds rate, the rate banks pay to borrow from each other overnight, by a
total of 1.5 percentage points at its meetings on March 3 and March 15, 2020. These cuts
lowered the funds rate to a range of 0% to 0.25%. This move was aimed at supporting
spending by lowering the cost of borrowing for households and businesses. The Fed resumed
purchasing massive amounts of debt securities. On March15, 2020, Fed said that it would buy
at least $500 billion in Treasury securities and $200 billion in government-guaranteed
mortgage-backed securities over “the coming months.” In June2020, the Fed set its rate of
purchases to at least $80 billion a month in Treasuries and $40 billion in residential and
commercial mortgage-backed securities until further notice.

Page 1 of 4
 In November 2021 the Fed began tapering its pace of asset purchases by $10 billion in
Treasuries and $5 billion in MBS each month. At the subsequent meeting in
December2021, the Fed doubled its speed of tapering, reducing its bond purchases by $20
billion in Treasuries and $10 billion in MBS each month.
Draw a diagram and explain using the IS -LM model the impact of the Federal Reserve
policy of 2020 on the US economy? (4 marks)
Why do you think Federal Reserve started to taper(reduce) its pace of asset purchase in
2021? (2 mark)
‘If an economy is in liquidity trap, fiscal policy is more effective than monetary policy.’
Do you agree? Draw diagram and explain your answer. (4 marks)

2. (Attempt Any 8 Questions) 40

A. Assume that a country got independence and was divided into two separate countries. Both 5
countries had identical parameters when they started as follows:

C = 70 + 0.5Y
I = 100
G = 50

However, due to various economic factors, Country A saw a fall in autonomous consumption
to 50, whereas Country B saw an increase in the marginal propensity to consume by 0.1. If
everything else remained constant, evaluate the equilibrium of both countries before and after
the changes. (5 marks)

B. What is Paradox of Thrift? How can it be avoided? (3 marks) 5

In a four sector economy with lump sum taxes, what happens to the government expenditure
multiplier if the value of marginal propensity to import becomes equal to marginal propensity
to consume? (2 marks)

C. Evaluate the impact of changes in interest rates on the currency-deposit ratio and reserve- 5
deposit ratio. How do shifts in interest rates influence depositors' preferences for holding cash
versus keeping funds in interest-bearing accounts? (5 marks)

D. a. Unlike the classical economists who recognized only the medium of exchange function of 5
money, Keynes emphasized that money was demanded for 3 motives. Discuss in brief these 3
motives of demand for money. (3 marks)

b. As per Keynes, uncertainty about the future prices of bonds gives rise to speculative demand
for money. Explain using suitable diagram. (2 marks)

Page 2 of 4
E. From 1995 to 2005 the Chinese currency, the yuan, was pegged to the dollar at an exchange 5
rate of 8.28 yuan per U.S. dollar. This policy of fixing the exchange rate was combined with a
policy of restricting international capital flows. Chinese citizens were not allowed to convert
their savings into dollars or Euros and invest abroad. The pegged yuan and capital immobility
became a contentious political issue in the United States. In response to these concerns,
President Bush called on China to let its currency float and allow capital mobility. Charles
Shumer, Senator from New York, proposed a more drastic step – a tariff of 27.5 percent on
Chinese imports until China adjusted the value of its currency. With dwindling economic
growth and an additional tariff imposed, China adopted a flexible exchange rate regime and
lifted the restrictions on capital flows. Now China has to evaluate whether expansionary fiscal
or monetary policy will pull their economy up.

With flexible exchange rate and perfect capital mobility, suggest whether China should adopt
an expansionary fiscal or monetary policy? Justify your answer by evaluating how the policy
would improve China’s economic growth. [1+4=5 marks]

F. In the 1970s, economists and policymakers began to categorize the rise in aggregate prices as 5
different inflation types. “Demand-pull” inflation was the direct influence of macroeconomic
policy, and monetary policy in particular.
Define Sacrifice Ratio. Compare demand-pull inflation arising from real factors with that
arising from monetary factors. (1+4 = 5 marks)

G. a. Consider an economy with two firms - Firm A and Firm B. The table below summarizes 5
some transactions taking place in the economy. Calculate the National Income of the economy
by value-added method from the following data: [3 marks]

Items In Rs. Crores

Purchase of raw materials by firm A from firm B 10
Purchase of raw materials by firm B from firm A 20
Value of output by firm A 120
Value of output by firm B 100
Payment of indirect tax by Firm A 15
Payment of indirect tax by Firm B 5
Total depreciation by Firm A and Firm B taken together 20
NFIA 15
Subsidy to Firm A 5
Subsidy to Firm B 5

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 b. The difference between the government budget deficit and the trade deficit must equal the
difference between private saving and investment in a four-sector circular flow model. Explain.
[2 marks]

H. a) During 2021-22, India received foreign inward remittances of $89,127 million which was 5
the highest ever inward remittance received in a single year. Draw a diagram and explain its
effect on the value of rupee relative to the dollar in a flexible exchange rate system. (3 marks)

b) If an economy has deficit in its balance of payment what kind of monetary policy can be
used to tackle the deficit. (2 marks)

I. An economy shows the following features: 5

Consumption, C= 170+ 0.8Yd, where Yd is disposable income

Investment, I =180 -6i, where i is interest rate
Taxes, T= 100 + 0.5Y
Government expenditure, G= 90
Money demand, L= 0.2Y – 2i
Money Supply, M= 80

a. Find the equilibrium income and rate of interest. (2 marks)

b. Suppose the government increases its expenditure on education and health by 60. Find the
equilibrium income and interest rate. (2 marks)
c. Calculate the crowding out effect. (1 mark)

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