Exam Question Bank

• What is macroeconomics? How will you distinguish it from microeconomics? (Unit 1)
• What are the important problems that constitute the subject matter of macroeconomics? Briefly explain them. (Unit 1)
• What are macroeconomic paradoxes? Explain any two of them. Explain how these paradoxes limit the applicability of microeconomic theories to explain the behaviour of the economy as a whole. (Unit 1)
• In what sense did Keynes bring about a revolution in economics? (Unit 1)
• Macroeconomics has been described as a study of aggregates. Name some important 'aggregates' or variables whose behaviour is analysed in macroeconomics. Explain them briefly. (Unit 1)
• Why is there a need for a separate theory of macroeconomics? Explain. (Unit 1)
• Which of the following problems fall within the purview of macroeconomics? — general price level; output of the cotton textile industry; wage rate of a computer engineer; unemployment in the economy; factors determining economic growth; determination of national income; deficit in the balance of payments. (Unit 1)
• Explain the importance of the study of macroeconomics. (Unit 1)
• What policy instruments are available to the government to achieve full employment, price stability and economic growth? Explain them briefly. (Unit 1)

• Explain the circular flow of income in an economy. What does it measure? (Unit 2)
• Describe the circular flow of income in a two-sector economy with households and business firms. What determines the magnitude of the circular flow of income and expenditure? (Unit 2)
• What is meant by saving and investment? How do they affect the circular flow of income in a free market economy? (Unit 2)
• Despite the fact that the motives to save differ from the motives of businessmen to invest, in national income accounts savings are always equal to investment. (Unit 2)
• How does the addition of Government to a two-sector economy affect the circular flow of income? If the Government's budget is in deficit, how will it affect the circular flow of income? (Unit 2)
• Show with a circular income flow model of a two-sector economy that national product equals national income. (Unit 2)
• In a three-sector economy with firms, households and Government, show with a circular income flow model that the sum of private investment and Government expenditure equals the sum of saving and taxes. (Unit 2)
• What is meant by withdrawals and injections? How do they affect the size of the circular flow of income and expenditure in an economy? (Unit 2)
• If investment by business firms falls short of savings, how will it affect the circular flow of income? (Unit 2)
• How will the circular income flow in an economy be affected if a country has foreign trade transactions? (Unit 2)
• In an open economy, explain with a circular income flow model that the sum of investment, Government expenditure and net exports must equal the sum of savings and taxes. (Unit 2)
• Explain the saving–investment identity in an open economy. Show that the difference between saving and investment of an economy always equals the trade balance. (Unit 2)
• Define gross domestic product. Are the values of exports and imports included in it? (Unit 2)
• Distinguish between final goods and intermediate goods. Why are intermediate goods not included in the gross domestic product of a country? (Unit 2)
• What are the components of gross domestic product? Explain them briefly. (Unit 2)
• Distinguish between gross national product (GNP) and gross domestic product (GDP). In this connection explain 'net factor income from abroad'. (Unit 2)
• Define 'national income'. How is it different from gross domestic product (GDP)? Explain. (Unit 2)
• Explain how national income is measured through the expenditure method. What types of expenditure are included? (Unit 2)
• Explain the 'income method' of measuring national income. Which of the following will be included — transfer payments, imputed rent of self-occupied houses, hawala money, windfall gains, receipts from the sale of second-hand goods? (Unit 2)
• Is gross domestic product (GDP) a true indicator of the welfare of the society? Explain. (Unit 2)
• What is meant by net economic welfare? How is it derived or obtained from the estimate of GNP? (Unit 2)

• What is a consumption function? Explain the objective and subjective factors which determine consumption expenditure in the economy. (Unit 2)
• Explain Keynes' psychological law of consumption. Explain its importance in the determination of income and employment in the economy. (Unit 2)
• Explain and graphically represent the Keynesian consumption function C = a + bY. How do MPC and APC change with an increase in income in this consumption function? (Unit 2)
• What is a consumption function? Explain the factors that cause a shift in the consumption function. (Unit 2)
• (a) What is a saving function? Derive a saving function from the consumption function C = a + bY.  (b) Show that the sum of APC and APS is equal to one. (Unit 2)
• Distinguish between APC and MPC. What factors other than income are likely to be most important in determining consumption? (Unit 2)
• What is a consumption function? Explain its importance in the theory of determination of income and employment. (Unit 2)

• Briefly explain the AS–AD model of determination of national product. With this model explain the impact of (1) an increase in aggregate demand and (2) a decrease in aggregate supply on the price level and aggregate output. (Unit 2)
• Derive the aggregate demand curve (with a varying price level). Why does it slope downward? Show the effect of an increase in the nominal money stock on the aggregate demand curve. (Unit 2)
• Compare the Keynesian and Classical aggregate supply curves. Briefly explain their policy implications. (Unit 2)
• With the AS–AD model explain the multiplier effect of an increase in Government expenditure on aggregate output when (1) the price level remains constant and (2) the price level rises. (Unit 2)
• What is stagflation? Explain with the AS–AD model what can cause stagflation. (Unit 1 · Unit 2)
• Distinguish between short-run aggregate supply and long-run aggregate supply. What are the factors that cause a shift in them? (Unit 2)
• With the AS–AD model explain economic fluctuations in the economy. Explain the impact of an increase and a decrease in aggregate demand on GDP and the price level. (Unit 2)

• What is the IS curve? How is it derived from goods market equilibrium? (Unit 2)
• Define the IS curve. What are the factors that determine its slope or steepness? (Unit 2)
• What is the LM curve? How is it derived from money market equilibrium? On which factors do its slope and position depend? (Unit 2)
• How do the product and money markets interact to determine the short-run equilibrium level of national income and the rate of interest? (Unit 2)
• Using the IS-LM model, show that fiscal policy is more effective at a low rate of interest and low level of income, while monetary policy is more effective when the levels of income and the rate of interest are high. (Unit 2)
• Explain how far expansionary monetary policy is effective in increasing national income in each of the three ranges of the LM curve. In which range is fiscal policy most effective? (Unit 2)
• Using the IS-LM curve model, analyse the impact of an increase in the money supply on the equilibrium level of national income and the rate of interest. (Unit 2)
• What is the crowding-out effect of Government's fiscal policy? Is it very significant? What role does the interest elasticity of investment play in determining the slope of the IS curve? (Unit 2 · Unit 3)
• Why does the IS curve slope downward? How is it related to the investment multiplier in the Keynesian income theory? What factors cause a shift in the IS curve? (Unit 2)
• Explain with the aid of the IS-LM model the role of monetary policy in the stabilisation of the economy. (Unit 3)

• Explain briefly the characteristics of a trade cycle. (Unit 3)
• Explain briefly the different phases of business cycles. (Unit 3)
• What is the accelerator? What role does it play in explaining business cycles in the economy? (Unit 3)
• Explain how the interaction of the multiplier and the accelerator explains cyclical fluctuations in the economy. (Unit 3)
• Explain Keynes's contribution to business cycle theory. Is his theory a sufficient explanation of business cycles? (Unit 3)

Chapter 27's remaining review questions cover Hawtrey's monetary theory, Marx's underconsumption theory, Hayek's and Wicksell's over-investment theories and Hicks's model — individual theories of the trade cycle that sit beyond your syllabus wording ("Introduction, Phases, Causes of Fluctuations"). They are noted here for completeness, not as expected midterm questions.

• What is meant by fiscal policy? Why did Keynes argue for the adoption of a proper fiscal policy as an instrument of demand management to get out of depression? (Unit 3)
• Explain the various objectives of fiscal policy in advanced developed economies. (Unit 3)
• Explain the role of fiscal policy in overcoming recession and in achieving economic stability at the full-employment level. (Unit 3)
• What is meant by discretionary fiscal policy? How does it differ from the fiscal policy of automatic stabilizers? Explain the effectiveness of discretionary fiscal policy in curing recession. (Unit 3)
• Explain fiscal policy measures to control inflation. How far do you think they can be effective? (Unit 3)
• What is meant by the crowding-out effect? Show how the expansionary effect of fiscal policy is reduced by the crowding-out effect. (Unit 3)
• What is meant by monetary policy? Briefly explain the instruments of monetary policy. (Unit 3)
• Explain the objectives of monetary policy. (Unit 3)
• Explain the monetary policy measures that should be adopted for curing recession and reviving the economy. How does expansionary monetary policy work? How does the Keynesian view differ from the monetarist view? (Unit 3)
• What is a liquidity trap? How does it make expansionary monetary policy ineffective in reviving the economy from recession? (Unit 3)
• Explain the mechanism through which tight monetary policy works to check inflation. Illustrate diagrammatically. (Unit 3)
• Explain the views of Friedman and the modern monetarists regarding monetary policy as a tool of economic stabilisation. (Unit 3)
• "Monetary policy for its success depends on fiscal policy." Explain and critically examine this statement. (Unit 3 · Fiscal)

• What is meant by the inflationary gap? How does it cause a continuous and persistent increase in the general price level? (Unit 3)
• What are the main factors that cause cost-push inflation? Suggest measures to control cost-push inflation. (Unit 3)
• Distinguish between demand-pull and cost-push inflation. How are they often intertwined? (Unit 3)
• Inflation may originate because of cost-push but it cannot be sustained for long unless it is supported by demand-pull inflation. Discuss. (Unit 3)
• Inflation in the less developed countries can be explained in terms of the structural features of these economies. Discuss. (Unit 3)
• Inflation is inevitable in an economy attempting to grow rapidly in the presence of structural bottlenecks. Discuss. (Unit 3)
• Define inflation. Explain its effects on (a) creditors and debtors, (b) persons of the fixed-income group. (Unit 3)
• Explain the effects of inflation on output and on the distribution of income. (Unit 3)
• Define inflation. What measures would you suggest to control it? (Unit 3)
• What is the Fisher effect? Show how the nominal interest rate depends on the inflation rate. (Unit 3)
• What are the social costs of inflation? Are they significant? (Unit 3)
• Explain the role of monetary policy in controlling inflation. Point out the limitations of tight monetary policy for curbing inflation. (Unit 3)
• Explain how fiscal policy can be used to check inflation. Comment on its efficacy. (Unit 3)
• What is supply-side inflation? How can it be tackled? (Unit 3)

• What is the Phillips curve? What kind of trade-off between the unemployment rate and the inflation rate does it imply? What are its policy implications? (Unit 3)
• What is meant by the trade-off between inflation and unemployment? Explain the Keynesian explanation of this trade-off. (Unit 3)
• What is meant by adaptive expectations? Explain how, with their help, Friedman shows that the short-run Phillips curve slopes downward while the long-run Phillips curve is vertical. (Unit 3)
• What is the natural rate hypothesis? (Unit 3)
• What effect do expectations regarding the rate of inflation have on the short-run Phillips curve? Can this help to explain stagflation? (Unit 3)
• Distinguish between the short-run and long-run Phillips curves. Explain why the long-run curve is vertical. (Unit 3)

• What are the main functions of a central bank? How does a central bank control the direction of credit? (Unit 4)
• How are the main functions of a central bank different from the functions of a commercial bank? (Unit 4)
• Explain the quantitative methods of credit control. Do you think these methods are adequate for effective control of credit supply? (Unit 4)
• How far are the quantitative methods of credit control effective in developing countries like India? (Unit 4)
• Compare bank rate and open market operations. Which is more effective as an instrument of credit control? (Unit 4)
• Explain the various methods of selective credit control and their significance for an economy like India. (Unit 4)
• Which methods — quantitative or qualitative — are better for India? (Unit 4)
• Explain how the Reserve Bank of India tries to maintain the exchange rate of the rupee. Illustrate diagrammatically. (Unit 4)

• Explain the concept of money supply. What are the factors responsible for the rapid increase in money supply? (Unit 4)
• Explain how the supply of money depends upon high-powered money, the currency–deposit ratio and the cash reserve ratio. (Unit 4)
• Explain the impact of a budget deficit on the supply of money in the economy. (Unit 5)
• Explain Fisher's transactions approach to the demand for money. Critically examine the Cambridge cash-balance theory and how it differs from Fisher's. (Unit 4)
• What, according to Keynes, are the motives for holding money? What factors determine the money held under these motives? (Unit 4)
• Why do people hold money when they can earn interest by lending it or buying bonds? (Unit 4)
• Explain the speculative motive for holding money. Why is it interest-elastic? Why does a rise in the interest rate cause a decline in bond prices? (Unit 4)
• What is meant by liquidity preference? Explain the motives of liquidity preference and its role in determining the rate of interest. (Unit 4)
• What is meant by the liquidity trap? How does its existence make expansionary monetary policy ineffective in a depression? (Unit 4)

• Why is government interference indispensable in a free-enterprise system? Does it ensure the fulfilment of social objectives? (Unit 5)
• What is a mixed economy? How does the government's role in a mixed economy differ from its role in a free-enterprise economy? (Unit 5)
• Do the government's economic activities necessarily restrict the growth of private business? (Unit 5)
• Explain how monetary and fiscal policies can help and hamper private business. (Unit 5)
• What is the significance of industrial policy in a mixed economy? (Unit 5)
• What are the main features of the New Industrial Policy? How is it different from the 1956 Industrial Policy? (Unit 5)
• How has the licensing policy of India affected the growth of industries? (Unit 5)
• What is the meaning and purpose of the joint sector? (Unit 5)
• Do businessmen have any social responsibilities to fulfil? If yes, how will you justify your answer? (Unit 5)
• What social responsibilities do business corporations owe to different sections of society? How can they reconcile profit maximisation with these responsibilities? (Unit 5)
• Is the social responsibility of business an ethical or a legal issue? (Unit 5)
• Write a note on the attitude of Indian businessmen towards their social responsibility. (Unit 5)
• What is meant by the fiscal (budget) deficit? How can it be financed? Does money financing always lead to inflation? (Unit 5)
• What is the inflation tax? How does inflation-tax revenue change with the rate of inflation? (Unit 5)

• Define macroeconomics. (Unit 1)
• What is Say's Law? (Unit 1)
• Define the paradox of thrift. (Unit 1)
• What is stagflation? (Unit 1)
• Define a leakage and an injection in the circular flow. (Unit 2)
• Define GDP, GNP, NDP and NNP. (Unit 2)
• What is net factor income from abroad? (Unit 2)
• Define personal income and personal disposable income. (Unit 2)
• What is the GNP deflator? (Unit 2)
• Define value added. What is the difference between GVA and NVA? (Unit 2)
• What is double counting? (Unit 2)
• What is Net Economic Welfare (NEW)? (Unit 2)
• Define APC, MPC, APS and MPS. (Unit 2)
• What is the break-even level of income? (Unit 2)
• Define dissaving. (Unit 2)
• What is the marginal efficiency of capital (MEC)? (Unit 2)
• Define aggregate demand and aggregate supply. (Unit 2)
• What is the real balance (wealth) effect? (Unit 2)
• What does the IS curve represent? What does the LM curve represent? (Unit 2)
• Define the liquidity trap. (Unit 2 · Unit 3)
• Define a business cycle / trade cycle. (Unit 3)
• What is a trough? What is a peak? (Unit 3)
• Define the accelerator. (Unit 3)
• What is an automatic (built-in) stabiliser? (Unit 3)
• Define the crowding-out effect. (Unit 3)
• Define CRR, SLR, bank rate and open market operations. (Unit 3)
• Define inflation. What are its two major types? (Unit 3)
• What is hyperinflation? What is stagflation? (Unit 3)
• Distinguish between deflation, disinflation and reflation. (Unit 3)
• What is the Phillips curve? What is NAIRU? (Unit 3)
• What is a central bank? Why is it called the lender of the last resort? (Unit 4)
• Define repo rate, reverse repo rate and margin requirement. (Unit 4)
• Define money and money supply. (Unit 4)
• What are M1 and M3? What is high-powered money? (Unit 4)
• What is liquidity preference? What is the liquidity trap? (Unit 4)
• What are externalities? Give one example of a spill-over cost and one of a spill-over benefit. (Unit 5)
• Define industrial policy. What is the joint sector? (Unit 5)
• Define corporate social responsibility. (Unit 5)
• What is the government budget constraint? Distinguish between revenue deficit and fiscal deficit. (Unit 5)

• Distinguish between microeconomics and macroeconomics on at least five points. (Unit 1)
• "What is true of the parts is not necessarily true of the whole." Discuss with reference to macroeconomic paradoxes. (Unit 1)
• Why did the Great Depression discredit classical economics and give rise to macroeconomics as a separate discipline? (Unit 1)
• How does an understanding of macroeconomics help a business manager take better decisions? (Unit 1)
• Explain the three broad categories of policy instruments available to a government, with an example of each. (Unit 1)
• Explain how the financial market converts household saving into firm investment in the two-sector model. (Unit 2)
• Why is national income measured at factor cost different from national income measured at market prices? (Unit 2)
• Distinguish between nominal GNP and real GNP. Why does the distinction matter? (Unit 2)
• State the precautions to be observed while estimating national income by each of the three methods. (Unit 2)
• Why can a rise in GDP coexist with a fall in welfare? Explain with at least three reasons. (Unit 2)
• State Keynes' psychological law of consumption and explain each of its three propositions. (Unit 2)
• Why does APC fall as income rises while MPC remains constant in the linear consumption function? (Unit 2)
• Explain the subjective and objective factors that shift the consumption function. (Unit 2)
• Why does the AD curve slope downward? Explain the three effects behind it. (Unit 2)
• Compare the classical, Keynesian and modern short-run aggregate supply curves and state the policy implication of each shape. (Unit 2)
• Why is the LM curve flat at low income and steep at high income? What does this imply for the effectiveness of fiscal and monetary policy? (Unit 2)
• State the four characteristics of a business cycle. (Unit 3)
• Why is investment the most volatile component of aggregate demand? (Unit 3)
• Compare the Keynesian and monetarist explanations of business cycles. (Unit 3)
• Distinguish between discretionary fiscal policy and automatic stabilisers, with two examples of each. (Unit 3)
• Explain the quantitative and qualitative instruments of monetary policy. (Unit 3)
• Compare fiscal policy and monetary policy as tools of stabilisation. When is each more effective? (Unit 3)
• Explain the causes and effects of inflation. What role does the government play in fighting inflation in a less developed country? (Unit 3)
• Explain the functions and objectives of the Reserve Bank of India. (Unit 4)
• Discuss the role of the central bank in the economic and sustainable development of a country. (Unit 4)
• Explain the functions of money. How did money overcome the difficulties of barter? (Unit 4)
• How do commercial banks create credit? What limits their power to do so? (Unit 4)
• Explain the shortcomings of the market mechanism and the government's role in capitalist, socialist and mixed economies. (Unit 5)
• Explain the various industrial policies implemented by the Government of India. (Unit 5)
• Explain the social responsibilities of business towards various sections of society. (Unit 5)

These require you to draw and label a diagram, then explain it. Every diagram named below is reproduced on the linked unit page, cropped straight from the textbook.

• Draw the circular flow of income in a two-sector economy with a financial market, and explain the leakage–injection balance. (Unit 2)
• Draw the circular flow in a three-sector economy including the government, and show that S + T = I + G. (Unit 2)
• Draw the four-sector (open economy) circular flow and show that S + T + M = I + G + X. (Unit 2)
• Draw a chart showing the relationship between GDP, GNP, NNP, NI, PI and PDI. (Unit 2)
• Draw the Keynesian consumption function with the 45° line, and mark the break-even point, the dissaving region and the saving region. (Unit 2)
• Draw the saving function derived from C = a + bY, and explain why it cuts the income axis at the break-even level. (Unit 2)
• Draw an AD curve and explain its downward slope. Show what happens when the money supply rises. (Unit 2)
• Draw the Keynesian AS curve (horizontal → upward-sloping → vertical) and explain the three ranges. (Unit 2)
• Derive the IS curve from goods-market equilibrium using a four-panel diagram. (Unit 2)
• Derive the LM curve from money-market equilibrium and explain why it slopes upward. (Unit 2)
• Draw the IS-LM equilibrium and show the effect of (a) an increase in government spending and (b) an increase in money supply. (Unit 2)
• Draw and label the four phases of a business cycle around the trend line. (Unit 3)
• Draw business cycles with a growth trend and explain how a "recession" can occur without output actually falling below the previous peak. (Unit 3)
• Illustrate diagrammatically how expansionary fiscal policy and expansionary monetary policy each raise output. (Unit 3)
• Illustrate demand-pull inflation with AD–AS curves, showing the wage adjustment back to the LAS. (Unit 3)
• Illustrate cost-push inflation and show why it leads to stagflation. (Unit 3)
• Draw the Phillips curve and explain the trade-off. Show the shifting short-run curves and the vertical long-run curve at NAIRU. (Unit 3)
• Draw Keynes's three demand-for-money curves and the total liquidity preference curve. (Unit 4)
• Show the liquidity trap on the money-demand curve and explain why an increase in money supply fails to lower the interest rate. (Unit 4)
• Draw a diagram relating high-powered money to the stock of money supply. (Unit 4)

• The economy has entered a recession. As a manager planning next year's capacity expansion, which macroeconomic indicators would you track and why? (Unit 1)
• Households across the country decide to save a larger share of their income during a downturn. Trace the effect on the circular flow, national income and eventually on saving itself. (Unit 1 · Unit 2)
• A government runs a large deficit financed by borrowing from the open market. Using both the circular flow and the IS-LM model, explain the likely effect on private investment. (Unit 2 · Unit 3)
• A country's GDP grows at 7% while air quality worsens sharply and unpaid household work rises. Has welfare improved? Justify your answer. (Unit 2)
• Oil prices double. Using the AD-AS framework, explain the effect on output and the price level, and name the resulting condition. (Unit 2)
• The economy is stuck at a very low interest rate and monetary expansion is not raising output. Diagnose the situation using the IS-LM model and recommend a policy. (Unit 2 · Unit 3)
• Inflation is running well above target. Which fiscal and monetary measures should the government and the central bank adopt? Explain the mechanism of each. (Unit 3 · Unit 3)
• Business confidence collapses and firms postpone investment. Using the multiplier–accelerator interaction, explain how a mild fall in investment can produce a full-blown contraction. (Unit 3)
• Identify which phase of the business cycle an economy is in, given: rising output, falling unemployment, rising prices and increasing bank credit. Justify with the characteristics of that phase. (Unit 3)
• Explain why income tax collections fall and unemployment benefit payments rise automatically during a recession, and why this is stabilising. (Unit 3)
• Food prices in India are rising after a failed monsoon. Will raising the repo rate solve the problem? What should the government do instead? (Unit 3)
• A bank receives a fresh deposit of ₹2,00,000 and the CRR is 10%. How much credit can the banking system create? What if the public withdraws part of each loan as cash? (Unit 4)
• Interest rates are near zero and the economy is in recession. Advise the government on which policy to use and why. (Unit 4)
• As a CSR head of a large Indian company covered by Section 135, how would you plan your CSR spending across stakeholders? (Unit 5)
• A state government wants to set up an electronics plant with public land and capital and private technology. Design it as a joint-sector venture. (Unit 5)

Fully worked numerical practice — with step-by-step solutions in the textbook's own style — lives on the dedicated Numerical Lab page, covering:

• National income by the value-added method, including exports and imports (Unit 2)
• National income by the income and expenditure methods; GNP and NNP at market prices (Unit 2)
• Deriving GDP_MP → NNP_FC → PI → PDI down the chain of concepts (Unit 2)
• Nominal vs real GNP and the GNP deflator (Unit 2)
• Completing a consumption–saving schedule: C, S, APC, MPC, APS, MPS (Unit 2)
• Writing the consumption and saving functions from data; finding the break-even income (Unit 2)
• The investment multiplier and the change in equilibrium income (Unit 2)
• Credit creation and the deposit multiplier from a primary deposit and CRR (Unit 4)
• The money multiplier and money supply from H, the currency–deposit ratio and the reserve ratio (Unit 4)
• Inflation rate from a price index and the Fisher equation (real vs nominal interest) (Unit 3)
• The government budget constraint and revenue, fiscal and primary deficits (Unit 5)