National Income: Concepts and Measurement

1. Which formula represents the expenditure approach to GDP?
(A) $GDP=C+I+G+(X-M)$
(B) $GDP=W+R+I+P$
(C) $GDP=S+T$
(D) $GDP=P\times Q$
Answer: (A)
Explanation: The expenditure approach sums consumption, investment, government spending, and net exports.

2. GNP is calculated by:
(A) $GNP=GDP+NFIA$
(B) $GNP=GDP-Depreciation$
(C) $GNP=GDP+Indirecttaxes$
(D) $GNP=GDP-Transfers$
Answer: (A)
Explanation: GNP considers domestic product plus net factor income from abroad.

3. The income approach of calculating National Income sums:
(A) Wages, Rent, Interest, Profit
(B) Imports, Exports
(C) Consumption, Investment
(D) Tax and Subsidy
Answer: (A)
Explanation: Income approach sums all factor incomes earned.

4. Which is not a flow variable?
(A) Wealth
(B) National income
(C) Wages
(D) Profits
Answer: (A)
Explanation: Wealth is a stock, measured at a point in time.

5. GNP at factor cost formula:
(A) $GN{P}_{FC}=GN{P}_{MP}-\text{Net Indirect Tax}$
(B) $GN{P}_{FC}=GD{P}_{MP}+NFIA$
(C) $GN{P}_{FC}=NN{P}_{FC}+Depreciation$
(D) $GN{P}_{FC}=GN{P}_{MP}+Depreciation$
Answer: (A)
Explanation: Factor cost is market price minus net indirect tax.

6. GDP deflator is:
(A) $\text{Deflator}=\frac{\text{Nominal GDP}}{\text{Real GDP}}\times 100$
(B) $\text{Deflator}=\text{Real GDP}\times \text{Nominal GDP}$
(C) $\text{Deflator}=P\times Q$
(D) $\text{Deflator}=PI\mathrm{/}NI$
Answer: (A)
Explanation: Compares nominal and real GDP to track inflation.

7. The value-added method focuses on:
(A) Output minus input cost
(B) Input cost
(C) Output plus input cost
(D) Only final expenditure
Answer: (A)
Explanation: Sums up net value created by each producer.

8. Net National Product at Factor Cost (NNPFC) formula:
(A) $NNPFC=GNP-Depreciation$
(B) $NNPFC=GDP-Depreciation$
(C) $NNPFC=GDP\times NDP$
(D) $NNPFC=GN{P}_{MP}-\text{Net Indirect Tax}$
Answer: (A)
Explanation: Net National Product is GNP minus depreciation.

9. Expenditure method in national income adds:
(A) Spending on final goods and services
(B) Transfer payments
(C) Imports only
(D) All income earned
Answer: (A)
Explanation: Expenditure method sums up all final expenditures.

10. Disposable income definition:
(A) Personal income minus taxes
(B) National income plus subsidies
(C) Capital income minus depreciation
(D) Personal income plus grants
Answer: (A)
Explanation: Disposable income is available for consumption and saving after taxes.

11. Which item is excluded from National Income calculation?
(A) Transfer payments
(B) Wages
(C) Rent
(D) Profits
Answer: (A)
Explanation: Transfer payments are not earned income.

12. NDP at market price formula:
(A) $ND{P}_{MP}=GD{P}_{MP}-Depreciation$
(B) $ND{P}_{MP}=GD{P}_{MP}+Depreciation$
(C) $ND{P}_{MP}=GDP\times NDP$
(D) $ND{P}_{MP}=GD{P}_{MP}-Transfers$
Answer: (A)
Explanation: NDP is GDP minus depreciation.

13. Net indirect taxes are:
(A) Indirect Taxes minus Subsidies
(B) Subsidies minus Indirect Taxes
(C) Direct Taxes minus Subsidies
(D) Transfer Payments plus Direct Taxes
Answer: (A)
Explanation: Only net indirect taxes matter for factor cost.

14. GDP at factor cost is:
(A) $GD{P}_{FC}=GD{P}_{MP}-\text{Net Indirect Tax}$
(B) $GD{P}_{FC}=GD{P}_{MP}+Depreciation$
(C) $GD{P}_{FC}=GD{P}_{MP}$
(D) $GD{P}_{FC}=GD{P}_{MP}\times \text{Net Indirect Tax}$
Answer: (A)
Explanation: Factor cost excludes taxes.

15. If net factor income from abroad is positive:
(A) GNP > GDP
(B) GDP > GNP
(C) GDP = GNP
(D) GDP < GNP
Answer: (A)
Explanation: Positive NFIA means GNP is greater.

16. India’s national income is computed by:
(A) Central Statistical Organization
(B) Reserve Bank of India
(C) IMF
(D) Ministry of Finance
Answer: (A)
Explanation: CSO is the official body.

17. Which is not included in Indian national income?
(A) Illegal income
(B) Agricultural income
(C) Industrial income
(D) Service sector income
Answer: (A)
Explanation: Illegal income is excluded.

18. GDP at market price includes:
(A) Final goods and services
(B) Intermediate products
(C) Transfer payments
(D) Non-market transactions
Answer: (A)
Explanation: Only final goods/services are counted.

19. Which example is a stock variable?
(A) Wealth
(B) Wages
(C) National Income
(D) Profits
Answer: (A)
Explanation: Wealth is measured at a point in time.

20. Which method uses all factor incomes for national income?
(A) Income method
(B) Product method
(C) Output method
(D) Expenditure method
Answer: (A)
Explanation: Income method adds up wages, rent, interest, and profit.

 

Determination of Output and Employment: Classical & Keynesian Approach

1. According to Classical economists, full employment is achieved due to:
(A) Wage and price flexibility
(B) Government intervention
(C) Aggregate demand policies
(D) Labor market rigidities
Answer: (A)
Explanation: Classical theory assumes that flexible wages and prices will adjust to restore full employment.

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2. In the Classical theory, unemployment is:
(A) Always voluntary or frictional
(B) Permanent
(C) A result of insufficient aggregate demand
(D) Impossible
Answer: (A)
Explanation: Unemployment, if present, arises due to transitions or voluntary actions, not lack of demand.

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3. Say’s Law in the Classical model states:
(A) Supply creates its own demand
(B) Demand creates its own supply
(C) Money supply determines output
(D) Government controls employment
Answer: (A)
Explanation: Say’s Law posits that total supply in the economy automatically generates an equivalent demand.

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4. The Classical aggregate supply curve is:
(A) Vertical
(B) Horizontal
(C) Upward sloping
(D) Downward sloping
Answer: (A)
Explanation: Classical AS is vertical, indicating output is determined by real factors at full employment.

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5. According to Keynes, the main determinant of output and employment is:
(A) Aggregate demand
(B) Aggregate supply
(C) Wage rate
(D) Price level
Answer: (A)
Explanation: Keynes argued that aggregate demand drives actual output and employment.

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6. Under the Keynesian model, involuntary unemployment can occur due to:
(A) Deficient aggregate demand
(B) Wage flexibility
(C) High capital stock
(D) Excess supply
Answer: (A)
Explanation: Persistent unemployment may result if aggregate demand is inadequate.

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7. In the Classical system, the labor market is in equilibrium when:
(A) Demand for labor equals supply of labor
(B) Government sets wage
(C) Real wage is rigid
(D) Only skilled workers are employed
Answer: (A)
Explanation: Labor market equilibrium is reached when demand equals supply at the market wage.

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8. Keynes opposed the Classical assumption by showing:
(A) Markets may not clear automatically
(B) Supply is always equal to demand
(C) Only voluntary unemployment exists
(D) Money supply doesn’t affect output
Answer: (A)
Explanation: Keynes showed that wage and price rigidities could prevent automatic market clearing.

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9. In Classical theory, the production function is:
(A) $Q=f(K,T,N)$
(B) $Q=K+T+N$
(C) $Q=K\times T\times N$
(D) $Q=K-T+N$
Answer: (A)
Explanation: Output is a function of capital, technology, and labor.

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10. The Keynesian model focuses on the:
(A) Short run
(B) Long run
(C) Very long run
(D) No specific time frame
Answer: (A)
Explanation: Keynesian analysis highlights short-run economic fluctuations.

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11. Classical theory relies on flexibility of:
(A) Wages and prices
(B) Aggregate demand
(C) Technology
(D) Tariff rates
Answer: (A)
Explanation: Wage and price flexibility are key to self-regulating classical markets.

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12. According to Keynes, wage rigidity leads to:
(A) Unemployment
(B) Higher prices
(C) Full employment
(D) Rising aggregate supply
Answer: (A)
Explanation: If wages don’t fall, unemployment can persist when demand is low.

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13. Keynesian equilibrium can be below full employment due to:
(A) Insufficient aggregate demand
(B) Excessive wage flexibility
(C) Increased net exports
(D) Full labor participation
Answer: (A)
Explanation: Keynesian equilibrium can result in underemployment.

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14. In Classical theory, the economy adjusts to shocks via:
(A) Wage and price changes
(B) Government stimulus
(C) Increasing aggregate demand
(D) Policy lags
Answer: (A)
Explanation: Flexibility enables self-correction post shock.

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15. The main policy recommendation of Keynesian theory is:
(A) Active government intervention
(B) Laissez-faire
(C) Strict monetary controls
(D) Free trade agreements
Answer: (A)
Explanation: Keynes advocated for fiscal and monetary policy to maintain demand.

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16. In Classical theory, money is viewed as:
(A) Neutral
(B) A real input
(C) Source of inflation
(D) Determinant of employment
Answer: (A)
Explanation: Changes in money supply only affect prices, not real output or employment.

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17. Keynes argued that interest rate is determined by:
(A) Liquidity preference and money supply
(B) Supply and demand of labor
(C) Capital-output ratio
(D) Wage flexibility
Answer: (A)
Explanation: Keynesian interest rate is set by demand and supply for money.

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18. According to Classical theory, unemployment is reduced by:
(A) Lowering wage rates
(B) Increasing government spending
(C) Raising the price level
(D) Direct job creation programs
Answer: (A)
Explanation: Wage reduction is considered sufficient to eliminate unemployment.

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19. In Keynesian economics, aggregate supply is:
(A) Upward sloping in the short run
(B) Vertical at full employment
(C) Horizontal always
(D) Unaffected by aggregate demand
Answer: (A)
Explanation: In the short run, aggregate supply responds to price changes.

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20. Which school sees ‘demand deficiency’ as a crucial cause of unemployment?
(A) Keynesian
(B) Classical
(C) Monetarist
(D) Supply-side
Answer: (A)
Explanation: Keynesians believe unemployment often stems from insufficient aggregate demand.

 

Consumption Function

1. The standard Keynesian consumption function is:
(A) $C=a+bY$
(B) $C=aY+b$
(C) $C=bY$
(D) $C=a+Y$
Answer: (A)
Explanation: Consumption equals autonomous consumption plus a proportion of income ($b$ is MPC).

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2. Autonomous consumption refers to:
(A) Consumption at zero income
(B) Consumption at full employment
(C) Income minus taxes
(D) Total savings
Answer: (A)
Explanation: Autonomous consumption ($a$) is what people consume even when income is zero.

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3. Marginal Propensity to Consume (MPC) is:
(A) $MPC=\frac{\mathrm{\Delta }C}{\mathrm{\Delta }Y}$
(B) $MPC=\frac{C}{Y}$
(C) $MPC=\mathrm{\Delta }Y\mathrm{/}\mathrm{\Delta }C$
(D) $MPC=a+bY$
Answer: (A)
Explanation: MPC measures the ratio of change in consumption to change in income.

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4. If MPC is 0.8, a Rs. 100 increase in income will increase consumption by:
(A) Rs. 80
(B) Rs. 100
(C) Rs. 20
(D) Rs. 180
Answer: (A)
Explanation: With MPC = 0.8, consumption rises by 80% of income increase.

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5. The slope of the consumption function is given by:
(A) MPC
(B) APC
(C) Autonomous consumption
(D) Income level
Answer: (A)
Explanation: Slope is marginal propensity to consume.

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6. According to Keynes, the most important determinant of consumption is:
(A) Income
(B) Interest rate
(C) Wealth
(D) Tax rate
Answer: (A)
Explanation: Keynes identified income as the main driver for consumption.

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7. Average Propensity to Consume (APC) is:
(A) $APC=\frac{C}{Y}$
(B) $APC=\frac{Y}{C}$
(C) $APC=a\mathrm{/}Y$
(D) $APC=\mathrm{\Delta }C\mathrm{/}\mathrm{\Delta }Y$
Answer: (A)
Explanation: APC is total consumption divided by total income.

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8. As income increases, APC:
(A) Falls
(B) Rises
(C) Remains constant
(D) Equals MPC
Answer: (A)
Explanation: People save a higher proportion, so APC declines with income.

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9. A consumption function with only induced consumption is:
(A) $C=bY$
(B) $C=a+bY$
(C) $C=aY+b$
(D) $C=a$
Answer: (A)
Explanation: If autonomous consumption is zero, only induced part remains.

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10. If a person’s income is zero, their consumption according to Keynesian theory is:
(A) Autonomous consumption
(B) Zero
(C) Equal to income
(D) Equal to savings
Answer: (A)
Explanation: Consumption at zero income is the autonomous part.

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11. Which is NOT a factor affecting consumption in Keynesian theory?
(A) Interest rate
(B) Real income
(C) Autonomous consumption
(D) Marginal propensity to consume
Answer: (A)
Explanation: The Keynesian function does not directly include the interest rate.

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12. The intercept of the linear consumption function represents:
(A) Autonomous consumption
(B) Marginal propensity to consume
(C) Income level
(D) Average propensity to consume
Answer: (A)
Explanation: The intercept ($a$) in $C=a+bY$ is autonomous consumption.

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13. The consumption function typically assumes:
(A) $0<MPC<1$
(B) $MPC>1$
(C) $MPC=0$
(D) $MPC<0$
Answer: (A)
Explanation: MPC must be positive but less than 1 for stability.

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14. An upward shift in the consumption function may be caused by:
(A) Increase in wealth
(B) Decrease in income
(C) Rise in taxes
(D) Lower MPC
Answer: (A)
Explanation: Higher wealth boosts consumption independent of income.

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15. Which equation describes induced consumption?
(A) $bY$
(B) $C=a$
(C) $APC\times Y$
(D) $Y-S$
Answer: (A)
Explanation: Induced consumption is the part dependent on income ($bY$).

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16. In the consumption function $C=a+bY$, $a$ is:
(A) Autonomous consumption
(B) MPC
(C) APC
(D) Income
Answer: (A)
Explanation: $a$ is the element not related to income.

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17. If income increases and consumption increases less, it indicates:
(A) MPC < 1
(B) MPC > 1
(C) MPC = 1
(D) MPC = 0
Answer: (A)
Explanation: People save part of the additional income.

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18. Consumption at zero income means:
(A) Borrowing or using savings
(B) Zero consumption
(C) Equal consumption and income
(D) Higher income
Answer: (A)
Explanation: Autonomous consumption could be from borrowing/savings.

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19. The graphical form of the consumption function is typically:
(A) Straight line with positive intercept
(B) Convex curve
(C) Horizontal line
(D) Downward sloping
Answer: (A)
Explanation: Linear in the Keynesian version.

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20. The consumption function helps policymakers to:
(A) Predict changes in aggregate demand
(B) Set interest rates
(C) Determine investment levels
(D) Plan foreign trade
Answer: (A)
Explanation: Consumption forecasts affect macroeconomic policy decisions.

Investment Function

1. The general investment function can be written as:
(A) $I=f(r,Y,q)$
(B) $I=C+S+Y$
(C) $I=M+X$
(D) $I=a+bY$
Answer: (A)
Explanation: Investment is a function of the interest rate $r$, output $Y$, and Tobin’s $q$.

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2. In Keynesian economics, investment depends primarily on:
(A) Expected profit and interest rate
(B) Autonomous consumption
(C) Marginal propensity to consume
(D) Money supply
Answer: (A)
Explanation: Firms invest when expected returns outweigh borrowing costs (interest rate).

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3. Induced investment is:
(A) Income elastic
(B) Income inelastic
(C) Autonomous
(D) Zero
Answer: (A)
Explanation: Induced investment rises with income level.

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4. Autonomous investment:
(A) Is independent of income
(B) Rises with income
(C) Is equal to zero always
(D) Is driven by MPC
Answer: (A)
Explanation: It is not linked to changes in current income.

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5. The investment demand curve typically:
(A) Slopes downward
(B) Is vertical
(C) Slopes upward
(D) Is horizontal
Answer: (A)
Explanation: As interest rates decrease, investment increases.

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6. Marginal Efficiency of Capital (MEC) means:
(A) Expected rate of return on new investments
(B) Interest rate on loans
(C) Average rate of return
(D) Cost of capital
Answer: (A)
Explanation: MEC is the anticipated profitability of capital assets.

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7. The formula for change in capital stock is:
(A) $\mathrm{\Delta }{K}_t=K_t-K_0$
(B) $\mathrm{\Delta }{K}_t=K_0\mathrm{/}{K}_t$
(C) $\mathrm{\Delta }{K}_t=S_t-I_t$
(D) $\mathrm{\Delta }{K}_t=I_0-K_0$
Answer: (A)
Explanation: Change in capital stock over time is current minus initial.

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8. An upward shift in the investment function indicates:
(A) Increased optimism
(B) Higher interest rates
(C) Decreased profits
(D) Lower output
Answer: (A)
Explanation: When firms expect better future returns, investment rises.

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9. Which investment is NOT influenced by income changes?
(A) Autonomous investment
(B) Induced investment
(C) Net investment
(D) Gross investment
Answer: (A)
Explanation: Autonomous investment remains constant regardless of income level.

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10. Tobin’s $q$ is defined as:
(A) Ratio of market value to replacement cost of capital
(B) Ratio of income to consumption
(C) Interest rate over time
(D) Ratio of investment to stock
Answer: (A)
Explanation: Measures incentive for new investment.

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11. The accelerator principle is described by:
(A) $I_t=v(Y_t-Y_{t-1})$
(B) $I=a+bY$
(C) $I=C+S$
(D) $I=r-Y$
Answer: (A)
Explanation: Investment depends on changes in output and the capital-output ratio.

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12. Investment is part of aggregate demand. The formula is:
(A) $AD=C+I+G+(X-M)$
(B) $Y=I+S$
(C) $C=a+bY$
(D) $S=Y-C$
Answer: (A)
Explanation: Aggregate demand includes investment.

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13. If interest rates fall, investment:
(A) Usually increases
(B) Is unaffected
(C) Always decreases
(D) Becomes zero
Answer: (A)
Explanation: Lower cost of borrowing encourages more investment.

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14. The investment curve for autonomous investment is:
(A) Horizontal to the X-axis
(B) Vertical to the Y-axis
(C) Sloped downward
(D) Sloped upward
Answer: (A)
Explanation: Autonomous investment is shown as a flat line; income-independent.

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15. According to Keynes, fluctuations in ‘animal spirits’ (business confidence) affect:
(A) Autonomous investment
(B) Induced investment
(C) Propensity to consume
(D) Wealth effect
Answer: (A)
Explanation: Animal spirits drive investment not linked to income.

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16. Investment multiplier is defined as:
(A) $k=\frac{1}{1-MPC}$
(B) $k=\frac{1}{MPS}$
(C) $k=C\mathrm{/}I$
(D) $k=I\mathrm{/}G$
Answer: (A)
Explanation: Shows the impact of investment on total income.

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17. When output increases, firms respond by:
(A) Expanding capital investment
(B) Reducing investment
(C) Increasing taxes
(D) Lowering wages
Answer: (A)
Explanation: More output often leads to greater investment.

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18. In investment function $I=f(r,Y)$, what does $r$ look like?
(A) Negative relationship
(B) Positive relationship
(C) No relationship
(D) Linear increase
Answer: (A)
Explanation: Investment falls as interest rate rises.

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19. Business expectations affect investment by:
(A) Changing the profitability prospects
(B) Fixing wage rates
(C) Increasing taxation
(D) Expanding subsidies
Answer: (A)
Explanation: Optimism or pessimism alters planned investment.

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20. If net investment is positive:
(A) Capital stock is increasing
(B) Capital stock is constant
(C) Capital stock is decreasing
(D) Profits are zero
Answer: (A)
Explanation: Net addition to the value of existing assets.

 

Multiplier and Accelerator

1. The investment multiplier ($k$) is given by:
(A) $k=\frac{1}{1-MPC}$
(B) $k=\frac{1}{MPS}$
(C) $k=MPC+MPS$
(D) $k=1+MPC$
Answer: (A)
Explanation: The multiplier amplifies initial investment through successive rounds depending on the marginal propensity to consume (MPC).

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2. If $MPC=0.7$, the value of the multiplier is:
(A) 4
(B) 1.33
(C) 0.25
(D) 3
Answer: (A)
Explanation: $k=\frac{1}{1-0.75}=4$.

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3. The accelerator principle is expressed as:
(A) $I_t=v(Y_t-Y_{t-1})$
(B) $I=a+bY$
(C) $I=cY$
(D) $I=f(S)$
Answer: (A)
Explanation: Investment depends on change in output and the capital-output ratio ($v$).

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4. The multiplier was first introduced by:
(A) R.F. Kahn
(B) J.M. Keynes
(C) D. Ricardo
(D) A.C. Pigou
Answer: (A)
Explanation: R.F. Kahn originally described the multiplier process.

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5. The main determinant of multiplier size is:
(A) Marginal propensity to consume
(B) Interest rate
(C) Capital-output ratio
(D) Wage rate
Answer: (A)
Explanation: Higher MPC results in a larger multiplier.

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6. If all income is consumed ($MPC=1$), the value of the multiplier is:
(A) Infinite
(B) 1
(C) 0
(D) Negative
Answer: (A)
Explanation: $k=\frac{1}{1-1}=\mathrm{\infty }$.

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7. The formula for the change in income due to investment is:
(A) $\mathrm{\Delta }Y=k\cdot \mathrm{\Delta }I$
(B) $\mathrm{\Delta }Y=\mathrm{\Delta }I\mathrm{/}k$
(C) $\mathrm{\Delta }Y=k\cdot \mathrm{\Delta }C$
(D) $\mathrm{\Delta }Y=\mathrm{\Delta }C+\mathrm{\Delta }S$
Answer: (A)
Explanation: Total change in income equals multiplier times change in investment.

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8. The multiplier process is strongest when:
(A) There are no leakages
(B) Savings increase rapidly
(C) Imports grow
(D) Taxes rise
Answer: (A)
Explanation: Leakages such as savings, taxes, and imports reduce the multiplier effect.

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9. A decrease in MPC will:
(A) Decrease the value of the multiplier
(B) Increase the value of the multiplier
(C) Not affect it
(D) Double it
Answer: (A)
Explanation: Smaller MPC leads to a smaller $k$.

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10. The primary effect of the accelerator is on:
(A) Investment
(B) Consumption
(C) Savings
(D) Exports
Answer: (A)
Explanation: Accelerator directly links investment to changes in income/output.

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11. If investment increases by Rs. 50 and the multiplier is 3, the total income change is:
(A) Rs. 150
(B) Rs. 53
(C) Rs. 100
(D) Rs. 3
Answer: (A)
Explanation: $\mathrm{\Delta }Y=k\cdot \mathrm{\Delta }I=3\times 50=150$.

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12. The process where income rises in successive rounds due to initial spending is called:
(A) Multiplier effect
(B) Supply effect
(C) Marginal effect
(D) Accelerator effect
Answer: (A)
Explanation: The multiplier describes successive increases in income and spending.

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13. The value of the accelerator ($v$) represents:
(A) Capital-output ratio
(B) Marginal propensity to save
(C) Rate of interest
(D) Wage rate
Answer: (A)
Explanation: Accelerator $v$ is the ratio of capital stock to output increase.

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14. What does a high value of multiplier indicate?
(A) Each rupee invested creates much additional income
(B) Savings are very high
(C) Little induced consumption
(D) Investment is inefficient
Answer: (A)
Explanation: Higher multiplier magnifies the initial investment’s effect.

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15. In an open economy, imports act as:
(A) Leakage from multiplier process
(B) Injection
(C) Source of domestic income
(D) Autonomous investment
Answer: (A)
Explanation: Part of income spent on imports does not stay in the domestic cycle.

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16. The multiplier effect is dampened by:
(A) High savings rate
(B) A high MPC
(C) No taxes
(D) Zero imports
Answer: (A)
Explanation: More saving means less spending, smaller multiplier impact.

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17. Which is NOT an assumption of the simple multiplier?
(A) No time lags
(B) Constant price level
(C) Infinite MPC
(D) Closed economy
Answer: (C)
Explanation: Infinite MPC leads to unrealistic results.

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18. In the accelerator formula, $v$ is usually:
(A) Greater than 1
(B) Less than 1
(C) Zero
(D) Negative
Answer: (A)
Explanation: Capital-output ratio is generally positive and above unity.

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19. When output rises quickly, the accelerator predicts:
(A) A surge in investment
(B) A fall in consumption
(C) No change in investment
(D) Decreasing employment
Answer: (A)
Explanation: Faster output growth requires rapid investment expansion.

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20. During a recession, with falling income, the accelerator effect may:
(A) Cause negative investment (disinvestment)
(B) Boost consumption
(C) Increase savings
(D) Increase exports
Answer: (A)
Explanation: Firms may reduce capital stock if output falls—a negative accelerator effect.

 

Demand for Money

1. The demand for money refers to:
(A) Desire to hold financial assets as money
(B) Desire to earn more money
(C) Demand for government bonds
(D) Demand for stocks
Answer: (A)
Explanation: In economics, it is the preference to hold assets in liquid cash or bank deposits.

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2. Keynes described three motives for holding money; they are:
(A) Transaction, precautionary, speculative
(B) Transaction, investment, saving
(C) Saving, investment, speculation
(D) Import, export, speculation
Answer: (A)
Explanation: Keynes identified three key reasons for the demand for money.

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3. Transaction demand for money depends mainly on:
(A) Income level
(B) Interest rate
(C) Price changes
(D) Government policy
Answer: (A)
Explanation: Higher income means more transactions, increasing demand.

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4. Precautionary demand for money arises due to:
(A) Uncertainty of future events
(B) Interest rates
(C) Planned purchases
(D) Imports
Answer: (A)
Explanation: It reflects money kept aside for unexpected expenses.

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5. Speculative demand for money is related to:
(A) Holding money for future investment opportunities
(B) Everyday transactions
(C) Emergency needs
(D) Price level only
Answer: (A)
Explanation: People keep cash ready to invest when the time is right.

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6. The classical quantity theory of money states the demand for money is primarily for:
(A) Transactions
(B) Precaution
(C) Speculation
(D) Investment
Answer: (A)
Explanation: Classical approach is mainly for making purchases.

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7. According to Keynes, speculative demand for money varies:
(A) Inversely with interest rate
(B) Directly with income
(C) Proportionally with price level
(D) Constantly
Answer: (A)
Explanation: When rates are low, people hold more money expecting better assets later.

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8. Baumol’s model is associated with:
(A) Transaction demand for money
(B) Speculative demand
(C) Precautionary demand
(D) Investment demand
Answer: (A)
Explanation: Baumol analyzed transaction demand rigorously.

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9. In Cambridge equation, demand for money is:
(A) $M^d=kPY$
(B) $M^d=r+Y$
(C) $M^d=S+C$
(D) $M^d=bY$
Answer: (A)
Explanation: Cambridge focused on money held as a fraction of income.

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10. Precautionary demand for money increases in:
(A) Times of uncertainty
(B) Booming market
(C) When interest rates are high
(D) When government spending is low
Answer: (A)
Explanation: Risk or instability boosts the “emergency” money held.

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11. The demand for money curve slopes:
(A) Downward
(B) Upward
(C) Flat
(D) Vertical
Answer: (A)
Explanation: Higher interest means less money demand; people prefer investments.

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12. Liquidity preference theory explains:
(A) Demand for money based on preference for liquidity
(B) Supply of money according to central bank
(C) Velocity of money in the economy
(D) Rate of monetary expansion
Answer: (A)
Explanation: Keynes’s theory centers around people’s choice for liquid assets.

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13. Transaction demand formula:
(A) $M_T^d=kY$
(B) $M_T^d=rY$
(C) $M_T^d=Y\mathrm{/}k$
(D) $M_T^d=M-Y$
Answer: (A)
Explanation: Proportion of income for transaction purposes.

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14. If interest rates rise, speculative demand for money will:
(A) Fall
(B) Remain unchanged
(C) Rise
(D) Double
Answer: (A)
Explanation: People switch from money to yielding assets when rates go up.

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15. Main determinant of transaction demand in Keynes’s model:
(A) Nominal income
(B) Interest rate
(C) Expected inflation
(D) Government policy
Answer: (A)
Explanation: More income means more transactions.

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16. If precautionary motive dominates, demand for money is driven by:
(A) Fear of emergencies
(B) Expected return
(C) Consumption needs
(D) Output level
Answer: (A)
Explanation: People keep extra cash when worried about the future.

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17. Speculative motive is higher when:
(A) Asset prices are volatile
(B) Taxes are high
(C) Output falls
(D) Government restricts credit
Answer: (A)
Explanation: People prefer cash if confident investments will get cheaper.

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18. The demand for money can be influenced by:
(A) Credit availability
(B) Gold prices
(C) Income taxes
(D) Tariff rates
Answer: (A)
Explanation: Easy credit can reduce actual cash needs.

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19. The demand for money at a macro level affects:
(A) Interest rate determination and monetary policy
(B) Only investment
(C) Trade deficit
(D) Labor market
Answer: (A)
Explanation: Money demand is central to monetary policy formulation.

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20. In macroeconomics, demand for money is:
(A) Amount of cash and near-cash people want to hold
(B) Amount of money produced by central bank
(C) Total money supply
(D) Value of exported goods
Answer: (A)
Explanation: It’s specifically the desire to keep assets in liquid form.

 

Supply of Money

1. The supply of money in an economy refers to:
(A) Total stock of currency and liquid deposits with the public
(B) Currency issued by the government only
(C) All money held by banks
(D) Only coins in circulation
Answer: (A)
Explanation: Money supply includes currency and liquid deposits available to the public, not money within banks or government reserves.

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2. The narrowest measure of money supply in India is:
(A) M1
(B) M2
(C) M3
(D) M4
Answer: (A)
Explanation: M1 includes currency with the public plus demand deposits at banks.

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3. M3 measure of money supply consists of:
(A) M1 + time deposits with banks
(B) Currency with public + demand deposits
(C) M2 + post office savings
(D) M2 + time deposits
Answer: (A)
Explanation: M3 accounts for near-money by adding time deposits to M1.

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4. The most liquid component of money supply is:
(A) Currency with the public
(B) Fixed deposits
(C) Savings deposits
(D) Corporate bonds
Answer: (A)
Explanation: Currency is most readily available for transactions.

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5. High powered money or monetary base refers to:
(A) Currency with public + reserves of banks with central bank
(B) Currency with government only
(C) All bonds issued by government
(D) Money held by foreign banks
Answer: (A)
Explanation: It’s the foundation for bank-created money through credit expansion.

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6. Money supply is measured at:
(A) A point in time (stock concept)
(B) Over a period (flow concept)
(C) End of the year only
(D) Fiscal quarter only
Answer: (A)
Explanation: Money supply is a stock variable.

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7. Which authority regulates the supply of money in India?
(A) Reserve Bank of India (RBI)
(B) Indian Government
(C) Central Statistical Office
(D) IMF
Answer: (A)
Explanation: RBI controls and monitors money supply via monetary policy.

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8. Open market operations by Central Bank affect:
(A) Money supply directly
(B) Tax revenue only
(C) National income calculation
(D) Imports and exports
Answer: (A)
Explanation: By buying/selling securities, central banks change the liquidity.

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9. The money multiplier formula is:
(A) $\text{Money Multiplier}=\frac{1}{\text{Required Reserve Ratio}}$
(B) $\text{Money Multiplier}=\text{M1}\mathrm{/}\text{M3}$
(C) $\text{Money Multiplier}=\text{Reserves}\mathrm{/}\text{Deposits}$
(D) $\text{Money Multiplier}=\text{M1}\times \text{Reserves}$
Answer: (A)
Explanation: A low reserve ratio causes a higher multiplier, creating more broad money.

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10. Time deposits are included in:
(A) M3 and broader aggregates
(B) M1 only
(C) M2 only
(D) M0 only
Answer: (A)
Explanation: Time deposits figure into broader measures of money supply but not M1.

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11. Supply of money affects:
(A) Inflation
(B) Only production
(C) Only trade
(D) Only investments
Answer: (A)
Explanation: Changes in money supply influence price levels and inflation.

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12. The currency deposit ratio is:
(A) Ratio of currency with public to bank deposits
(B) Ratio of time deposits to savings deposit
(C) Ratio of government currency holdings to M1
(D) Ratio of coins to currency notes
Answer: (A)
Explanation: Shows preference for holding cash over deposits.

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13. Broad money refers to:
(A) M3
(B) M1
(C) M0
(D) Physical currency only
Answer: (A)
Explanation: M3/consolidated money, including all deposits, is referred to as broad money.

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14. Cash Reserve Ratio (CRR) is:
(A) Portion of deposits banks must keep with RBI
(B) Portion of income paid as tax
(C) Currency with government
(D) Required savings by individuals
Answer: (A)
Explanation: CRR restricts bank lending to regulate money supply.

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15. Which is NOT included in money supply?
(A) Money held by government and banks
(B) Money in circulation with public
(C) Deposits available for transactions
(D) RBI balances with government
Answer: (A)
Explanation: Only public-held money is part of money supply.

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16. Repo rate relates to:
(A) Interest paid by RBI on short-term borrowing/lending with banks
(B) Export incentives
(C) Tax policy
(D) Non-banking financial activities
Answer: (A)
Explanation: Repo rate changes affect liquidity and money supply.

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17. Monetary aggregates differ in:
(A) Levels of liquidity
(B) Bank profitability
(C) International exchange rates
(D) Stock market indices
Answer: (A)
Explanation: Higher aggregates include less liquid assets.

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18. Which is a tool for supply of money regulation?
(A) Open market operations
(B) Direct taxation
(C) Export quotas
(D) Import tariffs
Answer: (A)
Explanation: The central bank uses it to inject or absorb money.

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19. Monetary base consists of:
(A) Currency with public and bank reserves
(B) All time deposits
(C) Bonds and securities
(D) Export-import receipts
Answer: (A)
Explanation: These are the most liquid assets forming the base.

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20. Increasing supply of money generally tends to:
(A) Raise inflation
(B) Reduce national income
(C) Lower production
(D) Boost exports directly
Answer: (A)
Explanation: As money supply increases, purchasing power rises, driving up prices.

 

IS–LM Model Approach

1. The IS curve shows:
(A) Goods market equilibrium
(B) Money market equilibrium
(C) Labor market equilibrium
(D) Foreign exchange market equilibrium
Answer: (A)
Explanation: The IS curve represents combinations of income and interest rates where the goods market is in equilibrium.

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2. The LM curve is derived by holding ______ constant:
(A) Real money balances
(B) Government spending
(C) Consumption
(D) Investment
Answer: (A)
Explanation: The LM curve holds real money supply ($M\mathrm{/}P$) constant and relates it to income and interest rates.

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3. The IS–LM model explains equilibrium in:
(A) Both goods and money market
(B) Only goods market
(C) Only labor market
(D) Only money market
Answer: (A)
Explanation: Equilibrium is at the intersection of IS and LM in both markets.

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4. The IS curve slopes downward because:
(A) Higher interest rates reduce investment and thus output
(B) Higher income increases output
(C) Higher income reduces consumption
(D) Higher savings reduce output
Answer: (A)
Explanation: As interest rates rise, investment (and aggregate demand) fall, lowering income.

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5. The LM curve is usually:
(A) Upward sloping
(B) Downward sloping
(C) Vertical
(D) Flat
Answer: (A)
Explanation: As income rises, demand for money rises, requiring higher interest rates for equilibrium.

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6. The IS curve shifts right due to:
(A) Increase in government spending
(B) Higher interest rates
(C) Decrease in real money balances
(D) Lower exports
Answer: (A)
Explanation: Fiscal expansion boosts aggregate demand, moving IS rightward.

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7. The LM curve shifts right when:
(A) Real money supply increases
(B) Government spending rises
(C) Exports decline
(D) Capital outflow occurs
Answer: (A)
Explanation: An increase in real balances ($M\mathrm{/}P$) means higher income at each interest rate.

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8. Intersection of IS and LM curves determines:
(A) Both equilibrium income and interest rate
(B) Only output
(C) Only price level
(D) Only government spending
Answer: (A)
Explanation: This point represents simultaneous equilibrium in goods and money markets.

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9. Which variable moves the IS curve?
(A) Fiscal policy (G or T)
(B) Money supply
(C) Capital stock
(D) Price level
Answer: (A)
Explanation: Changes in government spending ($G$) or taxes ($T$) shift IS.

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10. Which variable moves the LM curve?
(A) Money supply ($M$) or price level ($P$)
(B) Export demand
(C) Tax rate
(D) Real output
Answer: (A)
Explanation: The LM curve responds to changes in real money balances.

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11. If the interest sensitivity of investment is low, the IS curve is:
(A) Steep
(B) Flat
(C) Vertical
(D) Horizontal
Answer: (A)
Explanation: IS is steep when investment isn’t sensitive to interest rates.

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12. When the demand for money is highly sensitive to interest rates, the LM curve:
(A) Becomes flat
(B) Becomes vertical
(C) Shifts left
(D) Becomes steeper
Answer: (A)
Explanation: Flat LM means small interest rate changes cause large money demand changes.

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13. Equation for IS curve is:
(A) $Y=C(Y-T)+I(r)+G$
(B) $M\mathrm{/}P=L(r,Y)$
(C) $Y=C+I+G+X-M$
(D) $M=PQ$
Answer: (A)
Explanation: IS expresses output as a function of its demand components.

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14. Equation for LM curve is:
(A) $M\mathrm{/}P=L(r,Y)$
(B) $Y=C(Y-T)+I(r)+G$
(C) $S=f(Y)$
(D) $M=PQ$
Answer: (A)
Explanation: LM equates real money balances to demand for money.

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15. Expansionary fiscal policy in IS–LM causes:
(A) IS curve to shift right
(B) LM curve to shift right
(C) Both to shift right
(D) No shift
Answer: (A)
Explanation: Fiscal policy moves the IS curve.

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16. An increase in money supply leads to:
(A) Shift in LM curve to the right
(B) Leftward shift of IS curve
(C) Movement along IS curve
(D) Increase in taxes
Answer: (A)
Explanation: More money means the LM curve shifts right.

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17. If both IS and LM shift right, then:
(A) Output and interest rate both rise
(B) Output rises, interest rate falls or rises depending on magnitude
(C) Output falls, interest rate falls
(D) Output and interest rate both fall
Answer: (B)
Explanation: The direction of interest rate movement depends on relative shifts.

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18. In a liquidity trap, the LM curve is:
(A) Horizontal
(B) Vertical
(C) Upward sloping
(D) Downward sloping
Answer: (A)
Explanation: With very low interest rates, further increases in money supply do not lower rates.

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19. The IS–LM model is based on the assumption:
(A) Price level is fixed in the short run
(B) Prices are flexible
(C) Full employment always prevails
(D) Markets clear instantly
Answer: (A)
Explanation: IS–LM is a short-run model with price rigidity.

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20. The IS–LM model helps to:
(A) Analyze effects of monetary and fiscal policy
(B) Only monetary policy
(C) Only aggregate supply
(D) Study growth theory
Answer: (A)
Explanation: The framework is used for examining macro policy effectiveness.

 

Inflation and Phillips Curve Analysis

1. Inflation refers to:
(A) Sustained increase in general price level
(B) Rise in GDP
(C) Decline in money supply
(D) Increase in aggregate supply
Answer: (A)
Explanation: Inflation is a persistent rise in the average price level of goods and services.

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2. The Consumer Price Index (CPI) measures:
(A) Changes in retail prices to consumers
(B) Wholesale prices
(C) Agricultural output
(D) Corporate profits
Answer: (A)
Explanation: CPI tracks changes in the price of a typical basket of consumer goods and services.

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3. Demand-pull inflation is caused by:
(A) Excess aggregate demand over supply
(B) Increase in cost of production
(C) Higher exports
(D) Lower taxes
Answer: (A)
Explanation: Demand-pull inflation happens when demand exceeds available supply.

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4. Cost-push inflation arises due to:
(A) Increased production cost
(B) Higher consumer demand
(C) Higher imports
(D) Lower government spending
Answer: (A)
Explanation: Rising costs (like wages or raw materials) cause cost-push inflation.

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5. Hyperinflation is:
(A) Extremely rapid or out of control inflation
(B) Controlled price rise
(C) Stagnant prices
(D) Temporary inflation
Answer: (A)
Explanation: Hyperinflation is extremely fast, out-of-control price increase.

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6. The Phillips curve shows the relationship between:
(A) Inflation and unemployment
(B) Inflation and economic growth
(C) Wages and productivity
(D) Money supply and output
Answer: (A)
Explanation: The Phillips curve depicts an inverse relationship between inflation and unemployment.

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7. An upward-sloping short-run Phillips curve would indicate:
(A) No trade-off between inflation and unemployment
(B) A positive relationship
(C) A negative relationship
(D) Stable inflation regardless of unemployment
Answer: (B)
Explanation: Upward slope means both rise together – which contradicts classic Phillips curve.

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8. The long-run Phillips curve is typically:
(A) Vertical
(B) Downward sloping
(C) Horizontal
(D) Upward sloping
Answer: (A)
Explanation: In the long run, unemployment does not depend on inflation; the curve is vertical at the natural rate.

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9. Stagflation is a situation where:
(A) High inflation coincides with high unemployment
(B) Inflation falls and output rises
(C) Only unemployment is high
(D) Only inflation is high
Answer: (A)
Explanation: Stagflation defied the Phillips curve and showed the possibility of both high inflation and unemployment.

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10. Built-in inflation refers to:
(A) Inflation resulting from past expectations and indexed wages
(B) Inflation due to fiscal deficit
(C) External shocks
(D) Sudden changes
Answer: (A)
Explanation: Wage-price spirals and inflation expectations result in built-in inflation.

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11. Cost-of-living index is used to:
(A) Adjust wages as per price level changes
(B) Calculate GDP
(C) Assess fiscal policy
(D) Forecast exports
Answer: (A)
Explanation: It keeps real income stable by adjusting wages according to price level.

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12. The original Phillips curve relates:
(A) Wage inflation and unemployment
(B) Price inflation and unemployment
(C) Output and productivity
(D) Wages and price level
Answer: (A)
Explanation: A.W. Phillips first studied wage inflation and unemployment, later extended to price inflation.

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13. Which phenomenon questioned the validity of the Phillips Curve?
(A) Stagflation
(B) Deflation
(C) Boom
(D) Disinflation
Answer: (A)
Explanation: Stagflation (1970s) showed simultaneous high inflation and unemployment, contradicting the classic curve.

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14. The sacrifice ratio in the Phillips curve context is:
(A) Percentage point increase in unemployment per 1% decrease in inflation
(B) Percentage point decrease in unemployment per 1% increase in inflation
(C) Ratio of inflation to unemployment
(D) Ratio of output to wages
Answer: (A)
Explanation: The sacrifice ratio measures the cost of reducing inflation as increased unemployment.

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15. A downward sloping Phillips curve suggests:
(A) Inverse link between inflation and unemployment
(B) Both rise together
(C) Both fall together
(D) No relation
Answer: (A)
Explanation: Classic Phillips curve shows a trade-off between unemployment and inflation.

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16. Adaptive expectations theory explains:
(A) Expectations based on past inflation
(B) Rational, forward-looking behavior
(C) Fixed wage contracts
(D) Level of exports
Answer: (A)
Explanation: People form expectations by looking at past inflation.

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17. The non-accelerating inflation rate of unemployment (NAIRU) is the:
(A) Unemployment rate at which inflation remains steady
(B) Minimum unemployment possible
(C) Inflation rate at full employment
(D) Difference between GDP and potential GDP
Answer: (A)
Explanation: NAIRU is the unemployment level below which inflation begins to rise.

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18. In the long run, monetary policy can:
(A) Affect price level, not unemployment rate
(B) Lower unemployment below natural rate
(C) Permanently reduce inflation and unemployment
(D) Affect only government deficit
Answer: (A)
Explanation: In the long run, only price level is impacted—unemployment returns to natural rate.

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19. If actual unemployment falls below NAIRU, inflation tends to:
(A) Accelerate
(B) Be negative
(C) Remain unchanged
(D) Fall
Answer: (A)
Explanation: Below NAIRU, wage and price inflation pick up speed.

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20. According to the expectations-augmented Phillips curve:
(A) Inflation depends on expected inflation and unemployment gap
(B) Only on actual inflation rate
(C) Only on labor productivity
(D) Only on central bank policy
Answer: (A)
Explanation: $\pi ={\pi }^e-\beta (u-u^n)$, where $\pi$ is inflation, ${\pi }^e$ is expected inflation, $u$ is unemployment, $u^n$ is natural rate.