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macroeconomics canada in the global environment

Questions and Answers of Macroeconomics Canada In The Global Environment

1. Explain the major shortcomings of the Keynesian theory of demand for money. Do the post-Keynesian developments in monetary theory replace the Keynesian theory of demand for money?
12. Explain the classical theory of interest. Is this theory determinate? What is the Keynesian view on the classical theory of interest?
11. All versions of the quantity theory of money link the general price level to the change in supply of or demand for money. Explain with the help of relevant equations.
(c) M (1/k) = PR (d) MV = PR
(a) M /k = PR (b) M d = kPR
10. Which of the following equations is associated with neoclassical quantity theory of money?
9. Discuss elaborately the difference between the Fisher’s and Cambridge versions of quantity theory of money. Show the relationship between ‘Cambridge k’ and Fisher’s V.
(e) Cambridge cash-balance equation
(d) Fisher’s quantity theory
(c) Neoclassical version of quantity theory
(b) Classical version of quantity theory
(a) Income version of Fisher’s equation
8. Write the equation for the following quantity theories of money.
(c) MV = PY
(a) Md = kPR (b) MV = PT
7. Write the name of the quantity theory of money which is associated with each of the following equations.
(c) MV = PT (d) P = MV/ T
(a) M = PT /V (b) V = PT /M
6. Which of the following equations represents Fisher ’s quantity theory of money?
5. The quantity theory of money was developed essentially to explain the changes in the general price level. Do you agree with this statement? How can you derive the demand for money from the
4. Distinguish between transaction equation and income equation of the quantity theory of money. In what way is income version an improvement over the transaction equation?
3. Explain the income version of the quantity theory of money. How is this version different from Fisher ’s transaction equation?
12. What is the basis of Tobin’s q theory of investment. How is q theory different from other theories of investment decisions?
11. What is meant by rental cost of capital? How are the rental cost of capital and the desired stock of capital determined?
10. Explain the accelerator theory of investment.How is this theory different from the Keynesian theory of Investment?
9. Assuming an MEC schedule, a rate of interest and a capital stock, explain diagrammatically the process of capital accumulation.(Hint : For help, see Section 12.6).
8. Distinguish between MEC and MEI. Illustrate graphically the relationship between MEC and MEI.
(d) MEC decreases to 9 percent due to increase in operational cost.
(c) Cost of capital increases from Rs. 50 million to Rs. 60 million.
(b) MEC increases to 14 percent.
(a) Market rate of interest increases to 12 percent.
7. *Suppose a company is considering an investment of Rs. 50 million. The market rate of interest is 10 percent and anticipated marginal efficiency of investment is 12 percent.How will the company
6. What is internal rate of return? Suppose an investment project costs Rs. 5,000 and yields an annual income of Rs. 2,500 for a period of three years. Find the marginal efficiency of capital.
5. *Suppose an investment project costs Rs.5,000 and yields an annual income of Rs.2,500 for a period of three years. Find the marginal efficiency of capital.
4. Define and explain the concept of marginal efficiency of capital. What is its significance in investment decisions?
3. Suppose an investment yields an income of Rs. 500 in the first year, Rs. 1000 in the second year and Rs. 500 in the third year. If rate of interest is 10 percent, what is the present value of this
2. Explain the concept of the present value of a future income? Explain why it is necessary in investment decision to discount the future income stream.
(c) Net and gross investment.
(b) Autonomous and induced investment
(a) Capital and investment
1. Distinguish between the following:
What factors are responsible for economic recession or depression?
What determines the limit of economic growth of a country?
Why do some economies succeed in achieving a higher growth rate than others?
How do the growth factors contribute to economic growth?
What factors determine the economic growth of a country?
15. Examine critically the supply-side economics and its applicability to economics facing the problem of recession and unemployment.Lucas, Robert E. and Thomas J. Sargent, “After Keynesian
14. Supply-siders’ claim that tax cuts increase tax revenue is implausible. Explain and evaluate the statement.
13. What is meant by Laffer curve? What are its policy implications?
12. What is supply-side hypothesis in respect of incentives and factor supply? Explain in regard to (i) tax cut and labour supply, and (ii)tax cut and growth of capital.
11. Discuss elaborately the central theme of supply-side economics. Is supply side economics theory or policy oriented?
10. What are the main postulates of supply-side economics? How do they differ from the Keynesian postulates?
9. Keynesians hold that, during the period of recession, unemployed persons are involuntarily unemployment. New classical macroeconomists claim that there is nothing like involuntary unemployment.
8. New classical macroeconomists are of the view that fiscal and monetary policies affect output and employment neither in the short run nor in the long run. Explain and illustrate this view of new
7. Enumerate and explain the main propositions made by the new classical macroeconomists.
6. What is the central theme of the new classical macroeconomics? How does it differ from Keynesian and monetarist views on macroeconomic management?
What is the difference between rational expectations and irrational expectations? Why is irrational expectation called ‘backward looking?’
5. What is meant by rational expectations?
4. Monetarists believe that ‘only money works’and Keynesians argue that ‘money does not work’. What do you think is the basis of the extremely opposite views held by the monetarists and the
3. What are the Keynesian arguments against the monetarist view that the quantity of money is the prime determinant of the output and price levels in short as well as long run?
2. What are the main monetarist arguments against the Keynesian views in respect of the main determinant of the levels of output and price level? Illustrate their arguments graphically.
1. What is monetarism? Describe the essence of monetarism and its assumptions. How does the causation process work from change in money supply to change in output?
12. What is meant by ‘supply shock’? What kind of policy dilemma does it create? Is in your opinion classical or Keynesian approach more effective in tackling problems arising out of supply shock?
11. Is fiscal or monetary policy more effective in combating unemployment under the flexible money price system? Give reasons for your answer.
10. Explain and illustrate graphically how a rise in government spending affects price, output and employment.
9. Using a downward sloping aggregate demand curve and an upward sloping aggregate supply curve, show the existence of unemployment. Explain why unemployment is automatically eliminated if wages are
8. Explain graphically the synthesis between the classical and Keynesian aggregate supply curves. Why is AS curve price inelastic beyond a level of output?
7. What are the basic assumptions that create divergence in the classical and Keynesian AS curves?
6. How does the implication of classical assumption of flexible money wage for output and employment differ from that of the Keynesian assumption of rigid money wage?Show the difference graphically.
5. Explain and illustrate graphically the derivation of the aggregate supply curve with flexible and downward rigid money wage.
4. What is meant by the downward rigidity of the money wage rate? Why are money wages supposed to be rigid downward, not upward?
3. Why is the Keynesian assumption of a perfectly elastic aggregate supply curve is not consistent with the classical production function? Explain and illustrate graphically the derivation of the
2. Why is classical AS curve perfectly inelastic and Keynesian AS curve perfectly elastic?Why did economists feel the need for synthesising the classical and Keynesian AS curves?
1. Describe briefly the shortcomings of the classical and Keynesian theories. Why did modern economists feel the need for synthesising the classical and the Keynesian theories?
(e) The increase in the government spending required to ensure that the economy reaches full employment level of income at Rs 1200.D.U., B.Com(H), 2003 Note: For solution to the starred (*) problems,
(d) By how much the equilibrium income changes if investment increases by Rs 50,
(c) Net exports (X – M) at equilibrium income,
(b) Consumption at equilibrium income.
(a) The equilibrium level of income,
16. Suppose in an economy:Consumption function C = 150 + 0.75Yd Investment spending I = 100 Government spending G = 115 Tax Tx = 20 + 0.2Y Transfer Payments Tr = 40 Exports X = 35 Imports M = 15 +
(iv) How is your answer in part (i) affected if price is also doubled along with nominal money supply?[D.U. B. A.(H.), 2001]
(iii) Find the direction and magnitude of the shift in the LM curve if the nominal money supply is doubled.
Find the new level of equilibrium income and interest rate if all other equations remain unchanged.
(ii) Suppose the economy opens up with the following exports (X) and import (M)equations.X = 100 M = 20 + 0.1Y
(i) Compute the equilibrium level of income, Y and interest rate, i.
15.* The following equation describe an economy:Consumption C = 100 + 0.8Yd Investment I = 150 – 6i Government Expenditure G = 100 Income tax T = 0.25 Y Real demand for money M d = 0.2Y – 2i
14. What are the factors that cause a shift in the balance-of-payment function? Assuming export and import functions, illustrate the shift in the balance-of-payment function.
(c) A point above the balance-of-payment function shows a surplus and a point below it shows a deficit in the balance of payments.
(b) Each point on the balance-of-payment function shows equilibrium.
(a) A balance-of-payment function has a positive slope.
13. Explain and justify the following statements.
Find the balance-of-payment function. Also illustrate graphically the derivation of the balance-of-payment function.
Suppose X = 200 M = 40 + 0.1Y K = 120 – 5 i(where, i is an absolute number)
12.* Define the balance-of-payment function.
11. What is meant by the balance of payments?Distinguish between (a) current account and capital account, and (b) autonomous and induced or adjustment transactions.
(b) Show the effect of wholly tax-financed increases in the transfers on the equilibrium level of income.
(iii) New equilibrium level of income if government expenditure increases by 20.
(ii) Foreign trade multiplier.
(i) Equilibrium level of income.
10.* (a) The major macro aggregates for an economy are given as follows.Consumption C = 60 + 0.8Yd(Yd is disposable income)Investment I = 100 – 5i% Interest rate i = 6 Government expenditure G = 50

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