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XCELLON INSTITUTE - SCHOOL OF BUSINESS

BATCH 2010-12

Course: Macroeconomics
28/03/2011

MID TERM EXAM TERM 2 Total Marks: 100

hours

Date:

Duration: 3

Name of
student:_______________________________________________________
Roll Number:___________________

Batch: ________________

Note:
Exam is closed book. Students cannot carry their books,
laptops or mobile phones.
All questions are mandatory.
Write only on the space provided. Do not use additional
answer sheet.

Question No.
1
2
3
4
5
6
7
8
9
10
11
12
Total Marks

Marks
/3
/15
/5
/6
/5
/4
/10
/12
/6
/6
/15
/13
/100

Q. 1.
Marks: 3
Microeconomics examines the behavior of individual decision-making unitsbusiness
firms and households.
Macroeconomics deals with the economy as a whole; it examines the behavior of
economic aggregates such as aggregate income, consumption, investment, and the
overall level of prices.
Aggregate behavior refers to the behavior of all households and firms together.
On the basis of this knowledge, please, classify the following items by putting a tick
mark () in appropriate cell in table given below.
Item

Microeconomic

Macroeconomic

variable

variable

Surta Mehtas annual income

Rate of Inflation in China
Total Annual Production (in Rs) at
GM factory in Gujarat
US Dollar Indian Rupee Exchange
Rate
Rate of unemployment in the US
Subsidies provided by Indian govt
during year 2008-09
Q.2.
Marks: 15
There are three kinds of policy that the government has used to influence the
macroeconomy: Fiscal policy, Monetary policy and Growth or supply-side policies.
Fiscal policy refers to government policies concerning taxes and spending.
Monetary policy consists of tools used by the Federal Reserve to control the
quantity of money in the economy.
Growth policies are government policies that focus on stimulating aggregate
supply instead of aggregate demand.
With this knowledge, read the article given below and answer the questions at the end of
it;
Thu, Mar 24, 2011 | Updated 12.14PM IST
22 MAR, 2011, 05.49PM IST,PTI
Repeated rate hikes by RBI hurting India Inc: Assocham

NEW DELHI: Reserve Bank's repeated hikes in key policy rates is hurting Indian
corporates as it increases their cost of production and squeezes profit margins, industry
body Assocham today said.
It also asked the government to invest more in the infrastructure sector, besides reducing
the wasteful expenditure as a means to curb rising inflation.
"If the economy continues to use monetary policy without fiscal consolidation of
appropriate degree, higher interest rates will continue to fuel high cost of production and
squeeze profit margins of India Inc ," an Assocham study said.
The RBI has hiked its short-term lending (repo) and borrowing (reverse repo) rates eight
times since March, 2010, with a view to tighten liquidity supply for curbing inflation. Its
latest hike of 25 basis points each in repo and reverse repo rates was announced last
week.
Assocham said the country is pursuing a high growth strategy even as it has to deal with
high inflation on account of increase in price rise of food items and other commodities.
High interest rates, on account of increase in repo and reverse repo rates, will affect
attractiveness of investing in the industry and deter future projects, it said.
The Finance Minister had in his Budget speech had stressed that rising inflation could
be tackled without compromising on economic growth.
The study said a large part of the inflation problem stems from rising food prices that is
caused due to supply shortage. Even though some food article prices are now cooling,
the food articles index is still hovering at 10 per cent from last year.
"This has spurred a more broad-based inflation in manufactured goods," Assocham
Secretary General D S Rawat said.
Food inflation during the first week of March was 9.42 per cent. Even headline inflation
has been above 8 per cent, since February, 2010.
Non-food manufactured products inflation rate jumped to 6.1 per cent in February from
4.8 per cent in January, the study said.
At the same time, the industrial production dropped to 5.5 per cent in Q3 FY211 from
9.1 per cent in the previous quarter.
The production trends of consumer non-durables display another growth challenge, with
performance sliding to minus 1.9 per cent in Q3 from 1.5 per cent in Q2 FY11.
More worryingly, the growth in capital goods sector -- that reflects future industrial
growth prospects -- has tumbled to to 6.9 per cent in Q3 FY11 from 21.3 per cent in Q2,
the study said.
"This indicates not only the present sluggishness, but also a certain dip in the
performance of industrial sector in the short-term mainly due to rising input cost,"
Rawat said.
He said the price stability objective continues to be elusive, despite monetary action.
(2a) Which microeconomic factors of Indian corporate are being affected negatively by
Reserve Bank's repeated hikes in key policy rates? (Marks: 3)

______________________________________________________________________
______________________________________________________________
(2b) Assocham also asked the government to invest more in the infrastructure sector,
besides reducing the wasteful expenditure as a means to curb rising inflation. In what
type of policies can the Indian govt incorporate these suggestions Monetary, Fiscal or
Growth policies? Answer clearly. (Marks: 3)
______________________________________________________________________
______________________________________________________________
(2c ) Assocham study said a large part of the inflation problem stems from rising food
prices that is caused due to supply shortage. In what type of policies can the Indian govt
use to solve this problem Monetary, Fiscal or Growth policies? Answer clearly.
(Marks: 3)
______________________________________________________________________
______________________________________________________________
(2d) Which Macroeconomic variable in the article reflects future industrial growth
prospects? (Mark: 1)
__________________________________________________________________
What does it reflect? (Marks: 2)
______________________________________________________________________
______________________________________________________________
(2e) Now take a look at the diagram given below.

An expansion, or boom, is the period in the business cycle from a trough up to a peak,
during which output and employment rise. A contraction, recession, or slump is the
period in the business cycle from a peak down to a trough, during which output and
employment fall.
Refer again to the data mentioned in the Assocham study above. In which phase of
business cycle Indian economy seems to be positioned at present? Mention facts from
the article to support your answer. (Marks: 3)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Q.3.

Marks: 5

Fill in the two blank squares of the diagram above by placing the entities
HOUSEHOLDS and FIRMS correctly.

Q. 4

Marks: 6

A firms value added is the value of its output minus the value of the intermediate
goods the firm used to produce that output.
A farmer grows a kg of cotton and sells it to a textile processor for Rs.100/-.
The textile processor processes the cotton into cotton textile and sells it leading fashion
designer Rohit Valaya for Rs. 500/-.
The fashion designer Valaya uses the cotton textile to make a dress and sells it to Surta
Mehta for Rs. 2000/-.
Surta Mehta wears the beautiful dress and goes to Xcellon to attend Sustantivo.
Using the information given above,
(4a) Compute value added at each stage of production. Show all steps. (Marks: 4)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(4b) Compute Gross Domestic Product in this example. Show all steps. (Marks: 2)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Q.5.
Marks: 5
Suppose an automobile manufacturer produces Rs. 100 crore worth of cars during a
financial year, but only sells Rs. 90 crore worth of cars.
Does this violate the expenditure = output identity? ________________________
Where does the unsold output go?
______________________________________________________________________
______________________________________________________________________

Q.6.
Marks: 4
The words available to you to fill in the blanks are; value, price, intermediate, final,
current, modern, average, constant, base, latest, abnormal.
Select the appropriate word and fill in the blanks below to give meaning to lines.
GDP is the __________ of all __________ goods and services produced. Nominal
GDP measures these values using ___________ prices. Real GDP measures these
values using the prices of a _____________ year.
Q. 7.

Marks: 10

(7a) Name the sector selected by your group for Project Work in Macroeconomics.
(Mark:1)
____________________________________________________________________
(7b) What could be the impact of Union Budget 2010-11 on this sector as per the
assignment submitted by your group?!! (Marks:3)
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(7c) Take a look at the diagram below;

Create a similar diagram for the sector you have selected for your project work. Identify
and mention clearly various inputs, process and output. (Marks: 6)

Q.8.

Marks: 12
2006

2007

Price (Rs)

Quantity (kgs)

Price (Rs)

Quantity
(kgs)

Price (Rs)

Quantity
(kgs)

Good A

30

100

35

110

45

140

Good B

40

150

45

200

45

210

Good C

50

350

40

360

40

200

GDP Deflator = 100 x (Nominal GDP / Real GDP)

Using the data given in the table above, compute nominal GDP in each year.
Also compute real GDP and in each year using 2006 as the base year.
Compute GDP deflator for corresponding year.
Also find the Rate of Inflation using the values computed for GDP Deflator.
Show you calculation and write answer in appropriate cells of table below. (Marks: 6)
Nominal GDP
2006

2007

Real GDP

GDP
deflator

Inflation
rate

2008

Q.9.

Marks: 6

Take a look at the equation below;

(9a) Fill in the blanks below; (Marks: 3)

The GDP deflator is a _________________sum of _______________.
The weight on each price reflects that goods relative _________________ in GDP.
(9b) Can the weights change over time? ____________________ (Mark: 1)
Explain why.(Marks:2)
______________________________________________________________________

______________________________________________________________________
______________________________________________________________________
Q.10.
Marks: 6
The Consumer Price Index (CPI) is a weighted average of prices relative to their
value in the base period. The weight on each price relative reflects that goods
relative importance in the CPIs basket. Note that in CPI the weights remain fixed
over time.
Now use your common sense and fill in the blanks using appropriate option.
Two options available to you are CPI and GDP Deflator. Select only one of these two
to fill in the blank.
(10a) Prices of domestically produced Capital goods are included in
___________________________________.
(10b) The basket of goods changes every year for _____________________________.
(10c) prices of imported Consumer goods are excluded from
__________________________________.
Q.11.

Marks: 15

Market prices are the prices at which goods and services are sold in various markets to
households and firms.
Factor costs are the actual production costs at which goods and services are produced by
the firms and industries in an economy. Factor costs are really the costs of all the factors
of production such as labor , capital, energy, raw materials like steel etc that are used to
produce a given quantity of output in an economy. Factor costs are also called factor
gate costs since all the costs that are incurred to produce a given quantity of goods and
services take place behind the factory gate ie within the walls of the firms, plants etc in
an economy.
With this knowledge, refer to the tables containing Statements 3, 4, 5 and 6 below and
answer the following questions;
(11a) In year 2008-09, which Economic Activity or Industry has contributed the highest
to India's GDP at Factor Cost (at 2004-05 prices)?
______________________________________________________________________
(11b) Compared to Statement 3, all the corresponding values are higher in Statement 4.
Why?

______________________________________________________________________
__________________________________________________________________
(11c) Refer to Statement 5 and identify values of C, I, G and NX (at 2004-05 prices) for
year 2008-09. Change in stocks and valuables can be clubbed with I.
______________________________________________________________________
______________________________________________________________________
(11d) Which of the four statements appear to be following the equation C+I+G+NX to
calculate GDP?
______________________________________________________________________
(11e) Referring to Statement 3,4, 5 and 6, which one appears to be higher for year 200809 --- GDP at Factor Cost (at 2004-05prices) or GDP at Market Prices (at 200405prices)? Why?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

Q.12. Fill in the blanks.

Marks: 13

(a) _____________________ Function States the relationship between inputs and

output.
(b) The _____________ run is defined as the period of time taken to vary all factors of
production.
(c) _____________costs are the costs that are not related directly to production rent,
rates, insurance costs, admin costs, etc. They can change but not in relation to output.
(d) _______________ cost is the cost of adding one more unit of production.
(e) Diminishing __________________ returns results from adding successive quantities
of variable factors to a fixed factor.
(f) In the ____________run, increases in capacity can lead to increasing, decreasing or
constant returns to scale.
(g) If TR = P x Q, then AR = ____________.
(h) Economic Profit takes into account Explicit and ____________________Costs.
(i) Expenditure equals income because every rupee spent by a buyer becomes income to
the ______________.
(j) Y =

C + I + G + NX, where NX =____________________________.

(k) GDP is product produced ___________________ a country's borders.

(l) Changes in real GDP can only be due to changes in __________________, because
real GDP is constructed using constant base-year prices.
(m) GNP Net income earned from abroad = ______________.