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business
managerial economics

Questions and Answers of Managerial Economics

According to the statutory liquidity requirement, banks are required to maintain a certain fi xed proportion of their liabilities in the form of designated liquid assets.
Required reserves are cash balances which the central bank holds to meet its statutory reserve requirements.
Th e two categories of instruments of monetary policy at the disposal of the central bank are the quantitative or general measures and the qualitative or selective measures.
Monetary policy is an operation by the monetary authorities of the country.
What is devaluation? Discuss the conditions under which it is expected to improve a defi cit in the balance of payments of a country?
‘To determine whether the balance of payments is in equilibrium or disequilibrium, only the autonomous transactions are considered’. Explain.
‘Th e balance of payments of a country will always balance because of the double entry system of bookkeeping’.Explain.
What does the capital account of the balance of payments measure? Discuss the constituent of the capital account of the balance of payments.
What does the current account of the balance of payments measure? Discuss the constituent of the current account of the balance of payments.
Discuss the eff ectiveness of monetary and fi scal policies as expenditure-reducing policies in tackling a balanceof-payments defi cit.
Briefl y discuss the diff erent kinds of disequilibria in the balance of payments.
Diff erentiate between autonomous and accommodating transactions.
Write a short note on the Offi cial International Reserve Account.
Write short notes on the(a) Balance of trade(b) Balance of invisible trade.
According to the Marshall–Lerner condition, for a devaluation to have a positive eff ect on a country’s balance of payments, the sum of the absolute values of the elasticity of demand for its
Structural disequilibrium occurs due to business cycles.
To determine whether the balance of payments is in equilibrium or disequilibrium, only the accommodating transactions are considered.
Autonomous transactions are those transactions that take place independently of other items in the balance of payments.
Th e capital account of the balance of payments measures the fl ow of goods, services and income, which occur across the national borders.
Analyse the determination of the supply of foreign exchange in a fl exible or fl oating exchange rate system.
Explain the determination of the demand for foreign exchange in a fl exible or fl oating exchange rate system.
Which are the two nominal exchange rate systems? Analyse with the help of a brief history of the exchange rate systems adopted by the diff erent countries.
What are the functions performed by the foreign exchange market? Discuss.
What is Adam Smith’s theory of absolute advantage? Explain.
What are the factors that lead to fl uctuations in the exchange rate under a fl exible exchange rate system?Explain.
What are the factors that determine the shape and slope of the demand curve for foreign exchange in a fl exible exchange rate system?
(a) What is the exchange rate? Diff erentiate between the nominal and real exchange rates.(b) Which are the two nominal exchange rate systems? Explain.
What is hedging? Explain.
Write a short note on the terms of trade.
Th e real exchange rate is the rate at which the currency of one country is traded for the currency of another country.
Currency board is an arrangement, where a country abandons its domestic currency and adopts a strong foreign currency like the dollar.
Th e foreign exchange market is a market, where foreign currencies are purchased and sold.
Th e gross barter terms of trade can be written as XN MP TP=
Th e two classical theories, which gained popularity, were Adam Smith’s theory of comparative advantage and Ricardo’s theory of absolute advantage.
How is monetary policy used to achieve the stabilization in an economy? Discuss.
What are business cycles? What are the diff erent phases in a business cycle?
Discuss the neo-classical growth theory.
‘Th e Harrod–Domar model is a long-run model’. Comment.
What is economic growth? What are the factors that determine economic growth?
To implement the fi scal policy, the government has at its behest several instruments. Discuss.
What is an automatic stabilizer? How does it bring about stability in the economy?
What are stabilization policies? Discuss.
Depict the diff erent phases of a business cycle in a diagram.
What are business cycles?
Stabilization policies are also called counter-cyclical policies.
According to the pure monetary theory, the diff erent phases of a business cycle can be explained in terms of the interaction between the accelerator and the multiplier.
During the phase of prosperity, the economy is in a phase of expansion with an increase in the economic activity.
Business cycles relate to economic changes in the long run in production.
Th e neo-classical growth theory was presented by two famous economists, Sir Roy Harrod of the UK and Evesey Domar of the USA in the late 1930s.
Write short notes on the following theories of investment:(a) Accelerator theory of investment(b) Th e fl exible accelerator model(c) Th e q theory of investment
(a) Analyse the eff ect of a decrease in the rate of interest on capital accumulation.(b) Analyse the eff ect of an upward shift in the MEC schedule on capital accumulation.
What is the MEC? How can we arrive at the aggregate MEC schedule?
What is the present value of a capital asset? How is it related to discounting? Explain.
Write short notes on the following:(a) Capital and investment(b) Gross and net investment(c) Public and private investment(d) Induced and autonomous investment
‘MEI schedule represents the true investment demand schedule for the economy as a whole’. Comment.
On which three factors does a fi rm’s investment decision depend? Discuss.
‘Th e decision to invest is diff erent when compared with the decision to buy consumer goods’. Comment.
Distinguish between gross investment and net investment.
What is capital? How is it diff erent from investment?
Th e MEC schedule represents the true investment demand schedule for the economy as a whole.
For every fi rm, the MEC schedule is a stair-like curve while the aggregate MEC schedule is a downward sloping curve.
Th e supply price of a capital asset is the cost of replacing the capital asset, which is under consideration, with an old one.
Th e present value of a capital asset is the sum obtained aft er discounting the expected future yields over its entire life at the market rate of interest.
Investment which changes due to a change in income and the interest rate is called the autonomous investment.
Suppose in a two-sector model, consumption and investment functions are as follows:C = 600 + 0.80Y I = 1160 − 20r Th e demand for money and the supply of money are L = 0.20Y − 50r M = 1200 (a)
In a two-sector model, assume that the consumption and investment functions are as follows:C = 100 + 0.75Y I = 1500 − 10r Find(a) Th e equation of the IS curve.(b) Th e equation of the IS curve
Suppose the consumption and investment functions are as follows:C = 20 + 0.75Y.I = 400 − 2500r Find(a) Th e equation of the IS curve by the aggregate demand–aggregate supply approach.(b) Th e
Suppose the consumption and investment functions are as follows:C = 20 + 0.5Y I = 120 crore − 5r Find(a) Th e equation of the IS curve and plot it.(b) Th e equation of the IS curve when the
Suppose the saving and investment functions are as follows:S = −50 + 0.5Y I = 120 crore − 5r Find the equation of the IS curve and plot it.
Examine the eff ects of a shift in the IS curve.5 Examine the eff ects of a shift in the LM curve.
How is simultaneous equilibrium in the goods and money market achieved? Explain with the help of diagram/diagrams.
‘Th e money market equilibrium condition can be used to develop a graphical approach to the derivation of the LM curve’. Explain.
‘Th e two equilibrium conditions AD–AS approach and S–I approach can be used to develop a graphical approach to the derivation of the IS curve’. Explain.
Examine the eff ects of a simultaneous shift in both the IS and LM curves.
Show the algebraic derivation of(a) IS curve(b) LM curve
‘Th ere is only one combination of income and the rate of interest at which both the goods and the money market are in equilibrium’. Explain.
Write a short note on the LM curve.
Write a short note on the IS curve.
Th e shift in the LM curve can occur due to a shift in the in the investment function or the saving function.
Th ere is only one combination of income and the rate of interest at which both the goods and the money market are in equilibrium.
Th e LM curve is upward sloping showing that there is a direct relationship between income and the rate of interest.
Th e IS curve is upward sloping showing that there is a direct relationship between income and the rate of interest.
Th e IS–LM model is the foundation of long-run macroeconomics.
Th e equations in an economy are given as:Consumption function C = 50 + bYd Investment function ⎯I = 40 Tax T = 20 Government expenditure G = 40 Exports X = 20 Imports M = 20 + 0.1Y Marginal
Th e fundamental equations in an economy are given as:Consumption function C = 50 + 0.50Yd Investment function⎯I = 350 Tax T = 60 Government expenditure G = 200 Exports X = 90 Imports M = 0.05Y(a)
In an economy, the consumption function is C = 40 + 0.80Yd and investment is⎯I = ` 80 crore. Th e government expenditure is at ` 40 crore while the tax is a lump sum tax, where T = 0.10.(a) Find
Given the marginal propensity to consume as 0.75 and the proportional tax function as t = 20 per cent = 0.2.Find the change which will occur in the equilibrium level of income, when there is(a) An
Given the proportional tax function as t = 10 per cent = 0.1 and the marginal propensity to consume as 0.75, fi nd the change which will occur in the equilibrium level of income when there is(a) An
Show a graphical explanation to the determination of the equilibrium income and output in a four-sector model.
How is the equilibrium level of income and output determined in a four-sector model? Explain using both the aggregate demand–aggregate supply and the leakages equals injections approach.
What is the balanced budget multiplier? Discuss.
Write short notes on the following:(a) Government expenditure multiplier(b) Tax multiplier
How is income determined in a model, where there exists government expenditure, lump sum income taxes and transfer payments? Explain.
How does the introduction of government transfer payments aff ect a four-sector model?
Describe the import function and the exports function.
How is income determined in a model, where there exists government expenditure, transfer payments and proportional income tax? Explain.
Diff erentiate between the expansionary eff ect of an increase in transfer payments and that of an increase in government expenditure.
Show as to how the imposition of a tax, given the level of government expenditure, causes a reduction in the equilibrium level of income in a three-sector economy?
While exports must be added to the total fi nal expenditures, imports must be deducted from the total fi nal expenditures to arrive at the aggregate demand.
When exports are greater than imports, there exists a net import balance or an unfavourable balance of trade.

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