1.

Production Account Dr. Wages and salaries Dividends Retained profits Profit tax Excise tax Required to compute: GDP at factor cost Rs in crore 200 40 50 10 20 Sales to households Fixed investment Net change in inventories Exports Imports

Cr. Rs in crore 250 20 20 50 -20

(Ans) GDP at factor cost = Wages and salaries + Dividends + Retained profits + Profit tax = 200+40+50+10 = 300 2. The following is the information from the national income accounts for a country XXX. Rs in crore National income 3,850 Government purchases 930 Consumption 3,000 Net investment 300 Gross investment 800 GNP 4,800 Personal tax & non-tax payments 600 Transfer payments 510 Net interest 120 Government budget surplus 30 Dividends 100 Proprietors income & rental income of persons 320 Wages & salaries 2,920 Required to compute: a) Net indirect tax b) Taxes transfers c) Personal income d) Net exports

(Ans) (a) Net indirect taxes = NNP at market prices National income Or, Indirect taxes subsidies = (GNP at market price - depreciation) National income = GNP at market price (GI-NI) National income (where, Gross Investment (GI) Net Investment (NI) = Depreciation) = 4800 (800-300) 3850 = 4800-500-3850 = 450 (b) Taxes transfers = Government purchases + budget surplus = 930+30 = 960

(c) Personal income = (Wages + proprietors income + Net interest + dividends + transfer payments) = 2920+320+120+100+510 = 3970 (d) Net exports = GNP (C+I+G) = 4800-(3000+800+930) = 70 3. The following is the information from the national income accounts for country XXX. Rs in crore Net investments 450 Gross investment 1200 GNP 7200 Consumption 4500 Personal tax & non-tax payments 900 Transfer payments 780 Net interest 180 Government purchases 1440 National income 5775 Government budget surplus 45 Dividends 150 Proprietors income 480 Wages 4380 Required to compute: a) Corporate profit b) NNP c) Disposable Personal income d) Personal savings

(Ans) (a) Corporate profits = National income (wages + proprietors income + net interest) = 5775 (4380+480+180) = 735 (b) NNP = GNP Depreciation Depreciation = Gross investment Net investment = 1200-450 = 750 NNP = 7200 750 = 6450 (c) Personal disposable income = personal income personal taxes Personal income = (national income corporate profit) + transfer payments + dividends = (5775 -735) + 780 + 150 = 5970 Personal disposable income = 5970 900 = 5070 (d) Personal savings = personal disposable income consumption = 5070-4500=570 4. The figures given below pertain to the year 19x0-x1. All figures in Rs crore GNP at factor cost 95,023 Indirect taxes 14,723

NDP at market prices 1,00,422 NNP at market prices 1,00,575 GNP at market prices 1,07,226 Compute the values of: a) Depreciation b) Net factor income from abroad c) Subsidies d) NDP at factor cost (Ans) (a) Depreciation = GNP at market prices NNP at market prices = 107226 100575 = 6651 (b) Net factor income from abroad = NNP at market prices NDP at market prices = 100575 100422 = 153 (c) Subsidies = GNP at factor cost + indirect taxes GNP at market price = 95023 + 14723 107226 = 2520 (d) NDP at factor cost = NDP at market prices Indirect Taxes + subsidies = 100422 14723 + 2520 = 88219 5. The following is the information from the national income accounts for a hypothetical country: Rs in crore GNP at market prices 2400 Gross investment 400 Net investments 150 Consumption 1500 Government purchases of goods & services 480 National income 1925 Wages & salaries 1460 Proprietors income + rental income of persons 160 Dividends 50 Government budget surplus 15 Interest 60 Transfer payments 260 Personal tax & non-tax payments 300 Required to compute: a) NNP at market prices b) Net exports c) Net indirect taxes d) Corporate profits e) Taxes transfers f) Personal income g) Disposable personal income h) Personal savings

(Ans) (a) NNP = GNP Depreciation = 2400 250 = 2150

Depreciation = Gross Investment Net Investment = 400 150 = 250 (b) Net Exports = GNP (C+I+G) = 2400 (1500+400+480) = 20 (c) Net Indirect Taxes = NNP National income taxes = 2150 1925 = 225 (d) Corporate profits = NI (wages & salaries + proprietors income + rental income + net interest) = 1925 (1460+160+60) = 245 (e) Taxes transfers = Gross purchases + Budget Surplus = 480+15 = 495 (f) Personal income = National Income Corporate profits + transfer payments + dividends = 1925 245 + 260 + 50 = 1990 (g) Personal disposable income = personal income personal taxes & non-tax payments = 1990 300 = 1690 (h) Personal savings = Personal disposable income consumption = 1690 1500 = 190 6. The following equations are applicable to an economy. Consumption function C = 15 + 0.80Yd Disposable income Yd = Y T Tax function T = 0.25 T Investment function I = 450 12i Exogenous government expenditure G = 300 Transaction demand for money Mt = 0.20Y Speculative demand for money Ma = 145 60i Supply of money Ms = 300 Exports E = 225 Import function M = 5 + 0.2Y a) Derive the IS & LM curves b) Calculate the equilibrium income and interest rate c) Calculate equilibrium trade balance & budget deficit d) What is the change in equilibrium investment if there is an autonomous decrease of 50 in money supply? e) What is the change in transaction demand for money if there is an autonomous increase of 50 in money supply?

(Ans) (a) IS Curve: Y = C+I+G+(E-M) = 15 + 0.8 (Y0.25Y) + 450 12i + 300 + 225 (5+0.2Y) = 985 + 0.4Y 12i Y = 1642 20i LM Curve: Demand for money (Md) = Mt + Ma = 0.20Y + 145 60i Supply of money (Ms) = 300 At equilibrium Md = Ms or, 300 = 0.20Y + 145 60i or, Y = 775 + 300i (b) Equilibrium income

IS=LM 1642 20i = 775 + 300i or, 867 = 320i or, i = 2.71% Substituting i = 2.71% in IS curve, Y = 1642 20 (2.71) = 1588 (c) Equilibrium trade balance = exports imports = 225 5 0.2Y = 225 5 -0.2 (1588) = - 97.6 Budget deficit = G T = 300 0.25Y = 300 0.25 (1588) = 300 397 = -97 = Budget surplus (d) Original equilibrium investment = 450 12Y = 450 12 (2.71) = 417.5 When autonomous money supply decreases by 50 then the new LM curve is: 250 = 0.2Y + 145 60i or, Y = 525 + 300i Equilibrium interest rate: 1642 20i = 525 + 300i or, i = 3.49% Investment = 450 12 (3.49) = 408.12 Change in equilibrium investment = 408.12 417.5 = - 9.38 (e) Original transaction demand for money = 0.20Y = 0.20 (1588) = 317.6 When autonomous money supply increases by 50 then the new LM curve is: 350 = 0.20Y + 145 60i or, Y = 1025 + 300i At equilibrium: 1642 20i = 1025 + 300i or, 617 = 320i or, i = 1.93% Y = 1642 20 (1.93) = 1603.40 Transaction demand for money = 0.20 (1603.40) = 320.6 Change in transaction demand for money = 320.68 317.6 = 3.08 7. The following relations are derived for an economy. (All macro aggregates are in million units of currency and interest in terms of percent per annum) Savings function (S) -60 + 0.25Yd Disposable income (Yd) YT-R Transfer payments (R) 80 Tax function (T) 0.2Y Investment function (I) 1000 15i Exogenous government expenditure (G) 800 Import function (M) 20 + 0.10Y Export function (E) 400 Transaction demand for money (Mt / P) 0.2Y Speculative demand for money (Ma / P) 130 44i Money supply (Ms / P) 450 a) Derive IS & LM curves b) Compute income, interest rate, trade balance and budget deficit at equilibrium

c) If the government wants to keep the budget deficit at the minimum possible level without affecting the equilibrium level of income and interest rate in the economy, what course of action would you suggest? d) If the exogenous government expenditure is increased by 125, what will be the new equilibrium income? e) If the investment is desired to be maintained at the original level in spite of an increase in the government expenditure as in (4) above, what course of action would you suggest? (Ans) (a) IS Curve: Given savings function (S) = - 60 + 0.25Yd Consumption function (C) = 60 + 0.75Yd Equilibrium in goods market (IS Curve) will be: Y = C+I+G+(E-M) = 60+0.75(Y-0.2Y+80)+1000-15i+800+400-20-0.10Y = 2300+0.50Y-15i or, 0.5Y = 2300 15i or, Y = 4600 30i LM Curve: Equilibrium in money market (LM Curve) will be: Supply of money = Demand for money Ms / P = (Mt / P) + (Ma / P) or, 450 = 0.2Y + 130 44i or, - 0.2Y = 130 44i 450 or, 0.2Y = 320 + 44i or, Y = 1600 + 220i (b) Economy is in equilibrium when goods market and money market are in simultaneous equilibrium. Thus, Y = 4600 30i or, Y = 1600 220i or, 4600 30i = 1600 + 220i or, 250i = 3000 or, i = 12% Substitute the value of in IS Curve: Equilibrium income Y = 4600 30 (12) = 4600 360 = 4240 Trade balance = exports imports = 400{20+0.1(4240)} = -44 = trade deficit Budget deficit = (Govt. expenditure + Transfer payments) Taxes = (800+80) {0.2(4240)} = 32 (c) If the govt. wants to keep the budget deficit at the minimum without affecting the equilibrium level of income & interest rate in the economy, the transfer payments should be reduced to zero, simultaneously increasing the govt. expenditure by 0.75 (80) = 60. Thus, budget deficit will decrease by 20. (d) If the exogenous govt. expenditure is increased by 125, the new IS curve will be: 0.5Y = 2300 + 125 15i or, Y = 4850 30i Since, there is no change in demand for money or supply for money, LM curve remains the same.

Y = 1600 + 220i At equilibrium: 4850 30i = 1600 + 220i or, i = 13% New equilibrium income = 4850 30 (13) = 4460 (e) Original investment = 1000 15 (12) = 820 If the investment is to be maintained at the same level even after an increase in the govt. expenditure, the equilibrium interest should be maintained at the original level of 12%. Then from the IS curve the equilibrium income will be: Y = 4850 30 (12) = 4490 In the money market demand for money will be: {0.2 (4490)} + 130 44 (12) = 500 At equilibrium, demand for money should be equal to supply for money. So, money supply should be increased to 500. _____________________