Ramanujan College

(University of Delhi)

Course: BA (P) Economics Major (4th Semester)

Faculty: ISHA GUPTA
Subject: Intermediate Macroeconomics-1

[Continuous Assessment: 20 Marks; 40 Minutes]

Answer the Multiple Choice Questions (MCQs)

1) You are required to answer all the questions in this MCQ only through the Google
Form that is shared on the official class WhatsApp group.
2) This MCQ is for 20 Marks (Out of Continuous Assessment of 40 Marks under
NEP).
3) The Duration of this MCQ is 40 Minutes (4:00-4:40 pm, 5th May 2024) for
submitting your answers.
4) There is no negative marking in this MCQ. For any wrong answers, you will
receive zero.
5) You can submit your MCQ answers in Google Form only ONCE (This is one-
time submission). No second chances would be provided to anyone under any
circumstances.
6) The Google Form will automatically stop accepting any responses after sharp 4:40
pm of the given deadline.
7) No submission would be permitted after the above deadline.
8) If a student fails to submit within the deadline (for any reason), then he/she will
automatically be granted 0/20 for this MCQ evaluation.
9) MCQ scores of all the students would automatically and immediately be
forwarded to the college after the above deadline.

GOOD LUCK!

1. In the medium run, a decrease in the price of oil increases the natural level of
output. Choose the correct options from below:
I. This statement is false, because decrease in the price of oil increases the
real wage paid by firms & increases the natural rate of unemployment.
II. This statement is false, because decrease in the price of oil decreases the
real wage paid by firms & increases the natural rate of unemployment.
III. This statement is true, because decrease in the price of oil decreases the
real wage paid by firms & decreases the natural rate of unemployment.
IV. This statement is true, because decrease in the price of oil increases the
real wage paid by firms & decreases the natural rate of unemployment.

(1 Mark)
2. The aggregate supply relation captures the effects of output on the price level.
Choose the correct options from below:
I. This relation is derived from equilibrium in the labor market. Because an
increase in output decreases unemployment, increases wages and, in turn,
increases the price level.
II. This relation is derived from equilibrium in the goods market. Because an
increase in output decreases unemployment, decreases wages and, in turn,
increases the price level.
III. This relation is derived from equilibrium in the goods market. Because it is
a relation between the price level, the expected price level, and the level of
output.
IV. This relation is derived from equilibrium in the labor market. Because a
decrease in the expected price level leads, one for one, to a decrease in the
actual price level
(1 Mark)

3. A contractionary monetary policy leads in the medium run to a decrease in the

price level and increase in the real money stock until output has returned to its
natural level. This is because of the following transmission mechanism:
I. In the short run, it results in an increase in the real money stock, an
increase in the interest rate, and an increase in output. In the medium run,
money does not affect output, and changes in money are reflected in
proportional increases in the price level leading to neutrality of money.
II. In the short run, it results in a decrease in the real money stock, an increase
in the interest rate, and a decrease in output. In the medium run, money
does not affect output, and changes in money are reflected in proportional
increases in the price level leading to neutrality of money.
III. In the short run, it results in a decrease in the real money stock, a decrease
in the interest rate, and an increase in output. In the medium run, money
does not affect output, and changes in money are reflected in non-
proportional increases in the price level leading to neutrality of money.
IV. In the short run, it results in an increase in the real money stock, a decrease
in the interest rate, and a decrease in output. In the medium run, money
does not affect output, and changes in money are reflected in proportional
increases in the price level leading to neutrality of money.
(1 Mark)

4. The model of AD-AS describes the movements in output and the price level when
account is taken of equilibrium in the goods market, the financial markets, and the
labor market. This is explained by the following points:
a) The natural level of output can be determined by looking solely at the
aggregate demand relation.
b) The aggregate demand relation is downward sloping because at a higher price
level, consumers wish to purchase fewer goods.
c) In the absence of changes in fiscal or monetary policy, the economy will
always remain at the natural level of output.
d) Expansionary monetary policy has no effect on the level of output in the
medium run.
 e) Fiscal policy cannot affect investment in the short run because output always
returns to its natural level.

Which of the above 5 statements are true?

I. e), d) & a) = False, b) & c) = True
II. e), b) & a) = False, c) & d) = True
III. b) & a) = False, c), e) & d) = True
IV. d) & c) = False, b), a) & e) = True
(2 Marks)

5. Which of the following statements are true or false or uncertain?

a) The original Phillips curve relation has proven to be very stable across
countries and over time.
b) Policy makers can exploit the inflation–unemployment trade-off only
temporarily.
c) The aggregate supply relation is consistent with the Phillips curve as observed
before the 1970s, but not since.
d) In the late 1960s, the economists Milton Friedman and Edmund Phelps said
that policy makers could achieve as low a rate of unemployment as they
wanted.
e) The expectations-augmented Phillips curve is consistent with workers and
firms adapting their expectations after the macroeconomic experience of the
1960s.
f) The natural rate of unemployment is constant over time within a country.

Choose the correct options from below:

I. b), c), a) = False & d), e), f) = True
II. b), d), e) = True & a), c), f) = False
III. a), d), f) = False & b), c), e) = True
IV. a), e), f) = True & b), c), d) = False
(2 Marks)

6. In IS-LM model, there are two extreme cases in the operation of monetary policy.
Choose the correct option from below:
I. In the classical case, the demand for real balances is independent only at low
interest rates, so monetary policy is highly ineffective. In the liquidity trap
case, the public is willing to hold any amount of real balances at the going
interest rate, so changes in the supply of real balances have greater impact on
interest rates, aggregate demand and output.
II. In the classical case, the demand for real balances is highly dependent on the
rate of interest, so monetary policy is highly effective. In the liquidity trap
case, the public is not willing to hold any amount of real balances at the going
interest rate, so changes in the supply of real balances have no impact on
interest rates, aggregate demand and output.
III. In the classical case, the demand for real balances is independent of supply of
money, so monetary policy is highly effective. In the liquidity trap case, the
public is not willing to hold any amount of real balances at the going interest
 rate, so changes in the supply of real balances have no impact on interest rates,
aggregate demand and output.
IV. In the classical case, the demand for real balances is independent of the rate of
interest, so monetary policy is highly effective. In the liquidity trap case, the
public is willing to hold any amount of real balances at the going interest rate,
so changes in the supply of real balances have no impact on interest rates,
aggregate demand and output.
(2 Marks)

7. In IS-LM model, fiscal expansion still leads to an income expansion. However,

the rise in interest rates that comes about through the increase in money demand
caused by higher income dampens the expansion. This dampening effect can be
made smaller when:
I. The induced changes in interest rates are higher and the response of
investment demand to these interest rate changes is higher.
II. The induced changes in interest rates are smaller and the response of
investment demand to these interest rate changes is higher.
III. The induced changes in interest rates are smaller and the response of
investment demand to these interest rate changes is smaller.
IV. The induced changes in interest rates are higher and the response of
investment demand to these interest rate changes is smaller.
(1 Mark)

8. The question of the monetary-fiscal policy mix arises because expansionary

monetary policy reduces the interest rate while expansionary fiscal policy
increases the interest rate. This is due to the following:
I. Expansionary fiscal policy increases output while crowding out the level
of investment; Expansionary monetary policy increases both the output
and the level of investment.
II. Expansionary fiscal policy decreases output while crowding out the level
of investment; Expansionary monetary policy increases only the output,
but not the level of investment.
III. Expansionary fiscal policy increases output while crowding in the level of
investment; Expansionary monetary policy decreases output and increases
the level of investment.
IV. Expansionary fiscal policy decreases output while crowding in the level of
investment; Expansionary monetary policy decreases both the output and
the level of investment.
(1 Mark)

9. Equilibrium in the labor market requires that the real wage chosen in wage setting
be equal to the real wage implied by price setting. Which of the following
statements is additionally true in this regard?
I. Under the assumption that the expected price level is not equal to the
actual price level, equilibrium in the labor market determines the natural
unemployment rate.
 II. Under the assumption that the expected price level is equal to the actual
price level, equilibrium in the labor market determines the natural
unemployment rate.
III. Under the assumption that the expected price level is greater than the
actual price level, equilibrium in the labor market determines the actual
unemployment rate.
IV. Under the assumption that the expected price level is lower than the actual
price level, equilibrium in the labor market determines the actual
unemployment rate.
(1 Mark)

10. In the labour market, wages are set unilaterally by firms or by bargaining be-
tween workers and firms. They depend negatively on the unemployment rate and
positively on the expected price level. This is because of the following
fundamental reason:
I. Wages depend on the expected price level because they are typically set in
real terms. So even if the price level turns out to be different from what
was expected, real wages are typically readjusted.
II. Wages depend on the expected price level because they are typically set in
nominal terms. So even if the price level turns out to be different from
what was expected, wages are automatically readjusted.
III. Wages depend on the expected price level because they are typically set in
real terms. So even if the price level turns out to be the same from what
was expected, wages are typically readjusted.
IV. Wages depend on the expected price level because they are typically set in
nominal terms. So even if the price level turns out to be different from
what was expected, wages are typically not readjusted.
(1 Mark)

11. In adaptive expectations hypothesis, it assumes that individuals can be fooled

only temporarily. This is because of the following:
a) Individuals do not repeat their mistakes in the long run.
b) It takes time for individuals to adapt fully to their surroundings.
c) Forecast error of all individuals must be zero both in the short and the long
run.
d) Expectation of the variable will always be less than the variable itself when
the variable is rising and vice versa.

Which of the above statements is true?

I. b), d) = True & a), c) = False
II. b), c), d) = True & a) = False
III. a), b), d) = True & c) = False
IV. a), d) = True & b), c) = False
(1 Mark)
Consider the following system of equations that describe an economy.
C = 0.8(1 – t)Y
t = 0.25
I = 900 – 50i
G = 800
L = 0.25Y – 62.5i
M = 10000
P = 20

Answer the following questions based on the above information:

12. What is the IS-curve equation?

I. Y = 8500 – 125i
II. Y = 4250 – 125i
III. Y = 4250 – 25i
IV. Y = 8500 – 25i
(1 Mark)

13. What is the LM-curve equation?

I. Y = 2000 + 250i
II. Y = 40,000 + 160i
III. Y = 2000 – 250i
IV. Y = 40,000 – 160i
(1 Mark)

14. What are the equilibrium levels of income and the interest rate in this model?
I. Y = 5500; i = 3%
II. Y = 4500; i = 4%
III. Y = 4000; i = 5%
IV. Y = 3500; i = 6%
(2 Marks)

15. What is the slope of IS-curve?

I. –0.005
II. –0.006
III. –0.008
IV. –0.007
(1 Mark)

16. What is the slope of IS-curve?

I. 0.002
II. 0.003
III. 0.004
IV. 0.005
(1 Mark)