ICAR AICE-JRF/SRF (PhD admission and fellowship) · India · National Testing Agency for ICAR
Original practice questions written to the published syllabus · not past papersHow national income, money, prices and employment are determined and how monetary and fiscal policy act on them. Heavily used in the economic and social issues papers of development-bank and central-bank officer recruitment.
In the exams: agricultural economics PhD entrance and fellowship examinations (heavy); agricultural development bank officer recruitment, economic and social issues (heavy); central bank officer recruitment economic and social issues papers (reported); agricultural master's entrance examinations, agricultural economics (present)
ICAR AICE-JRF/SRF (PhD) Agricultural Economics, Unit 1 Economic Theory
Consumption hypotheses (relative, permanent, life-cycle), multiplier variants and the balanced-budget theorem, IS-LM special cases and crowding out, demand-for-money theories (Keynes, Baumol-Tobin, Friedman), expectations-augmented Phillips curve, Mundell-Fleming, Harrod-Domar and Solow, Lewis model, business-cycle theories.
How our questions for ICAR AICE-JRF/SRF spread across the units of Macroeconomics & Policy. Difficulty: 7 easy, 15 medium, 23 hard.
| Open-economy macro models (PhD level) | 9 | |
| Dynamic models and business cycles (PhD level) | 9 | |
| Money, interest and income | 4 | |
| Monetary policy instruments | 4 | |
| Classical theory of income determination | 3 | |
| Consumption, saving and investment functions | 3 | |
| IS-LM model | 3 | |
| Inflation and unemployment | 3 | |
| Fiscal policy instruments | 3 | |
| Multiplier and accelerator | 2 | |
| National income concepts and measurement | 1 | |
| Keynesian theory of income determination | 1 |
Choose an answer, then open the working. Each explanation says why the right answer is right and why the others are not.
When investment rises with the level of income (induced investment), an autonomous increase in the desire to save at every income level will, in the Keynesian model,
C. reduce equilibrium income and reduce the actual total amount saved
This is the paradox of thrift. With fixed investment, income falls until saving returns to the unchanged investment level, so total saving is unchanged. With investment rising with income, the fall in income also reduces investment, so equilibrium saving (equal to investment) actually falls. The interest-rate adjustment is the classical mechanism.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
In the basic life-cycle model with no bequests, which change would raise the aggregate saving rate of an economy?
B. Faster income growth, so working-age savers have higher lifetime incomes than retired dissavers
In the life-cycle model the young save and the old dissave. Faster income growth (and faster population growth) makes the saving of the working generations large relative to the dissaving of the retired, raising aggregate saving. A larger retired share, slower population growth or a transfer to retirees raise dissaving and lower the saving rate.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
According to Tobin's q theory, firms have an incentive to expand their capital stock when
A. the market value of installed capital exceeds its replacement cost
When q > 1 the stock market values new capital at more than it costs to buy, so investment adds value. q < 1 signals the opposite. An interest rate above the MEC discourages investment.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
If investment is completely insensitive to the interest rate, an increase in the money supply in the IS-LM model will
C. lower the interest rate but leave income unchanged
With interest-inelastic investment the IS curve is vertical. Shifting LM right lowers the interest rate along a vertical IS, so income does not change. This was the 'elasticity pessimism' argument some Keynesians made for relying on fiscal policy.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
According to Friedman and Phelps, the long-run Phillips curve is
C. vertical at the natural rate of unemployment, with no permanent inflation-unemployment trade-off
Once expected inflation adjusts to actual inflation, unemployment returns to its natural rate at any steady inflation rate. The trade-off exists only in the short run, while expectations lag. A permanent menu was the Samuelson-Solow reading of the original curve.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
Using the Taylor rule i = r* + inflation + 0.5(inflation - target) + 0.5(output gap), with r* = 1%, inflation 3%, target 2% and an output gap of -2%, what policy rate does the rule suggest?
C. 3.5%
i = 1 + 3 + 0.5(3 - 2) + 0.5(-2) = 1 + 3 + 0.5 - 1 = 3.5%. Getting the sign of the negative output gap wrong gives 5.5%; leaving out current inflation (so the rule gives a real, not nominal, rate) gives 0.5%; 4% ignores both gaps.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
In the Mundell-Fleming model of a small open economy with perfect capital mobility and a floating exchange rate,
D. monetary policy is effective in changing income, while fiscal policy is ineffective
Monetary expansion puts downward pressure on the interest rate, capital flows out, the currency depreciates and net exports rise. Fiscal expansion causes appreciation that reduces net exports by as much as government spending rose. With fixed rates the results reverse.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The 'impossible trinity' states that a country cannot simultaneously have
A. a fixed exchange rate, free capital mobility and an independent monetary policy
At most two of the three can be combined. Euro-area members keep fixed rates and capital mobility but give up independent monetary policy; many inflation targeters float; some countries keep a managed rate and monetary independence by limiting capital flows.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The J-curve describes how, after a currency depreciation, the trade balance
C. first worsens and then improves as trade volumes adjust
Import prices in domestic currency rise at once while volumes adjust with a lag, so the trade balance initially deteriorates before improving as the Marshall-Lerner condition comes to hold.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
In the Solow growth model without technical progress, a permanent rise in the saving rate
C. raises the steady-state level of output per worker but not its long-run growth rate
A higher saving rate raises capital per worker until diminishing returns bring investment back into line with depreciation and population growth, so output per worker rises to a higher level and then stops growing. Long-run per-capita growth requires technical progress.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
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