ICAR AIEEA-PG (Master's admission and PG scholarship) · 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 AIEEA-PG Group 06 (Agricultural Economics), Unit II
National income concepts and the GDP-GNP-NNP chain, APC/MPC, simple multiplier numericals, types of inflation and unemployment, functions of money, quantitative and qualitative credit control instruments.
How our questions for ICAR AIEEA-PG spread across the units of Macroeconomics & Policy. Difficulty: 24 easy, 25 medium, 8 hard.
| Multiplier and accelerator | 9 | |
| IS-LM model | 7 | |
| Classical theory of income determination | 6 | |
| Keynesian theory of income determination | 6 | |
| Consumption, saving and investment functions | 6 | |
| Money, interest and income | 6 | |
| National income concepts and measurement | 5 | |
| Inflation and unemployment | 4 | |
| Fiscal policy instruments | 4 | |
| Monetary policy instruments | 2 | |
| Dynamic models and business cycles (PhD level) | 2 |
Choose an answer, then open the working. Each explanation says why the right answer is right and why the others are not.
A farmer grows wheat using no purchased inputs and sells it to a miller for 300. The miller sells flour to a baker for 500, and the baker sells bread to consumers for 800. What is the total value added (contribution to GDP) of this chain?
D. 800
Value added at each stage is 300 (farmer), 200 (miller) and 300 (baker), totalling 800, which equals the value of the final good. Summing all sales (1600) double counts intermediate goods; 500 stops at the flour stage, and 300 is the baker's value added alone.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
According to Keynes, the level of output and employment in the short run is determined by
C. effective demand
Keynes's principle of effective demand holds that firms produce what they expect to sell, so aggregate demand determines short-run output. Money and prices are the quantity theory; the real wage and technology determine output in the classical long run.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
If the marginal propensity to consume is 0.7, the marginal propensity to save is
C. 0.3
MPC + MPS = 1, so MPS = 1 - 0.7 = 0.3. 1.43 is 1/0.7 and 3.33 is 1/0.3, which is the multiplier, not the MPS.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
Keynes defined the marginal efficiency of capital as
C. the discount rate equating the present value of an asset's expected returns with its supply price
The MEC is an internal rate of return; investment proceeds while it exceeds the market interest rate. The ratio of market value to replacement cost is Tobin's q; the extra output from capital is its marginal physical product.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
A cold-storage unit costs 1000 today and is expected to yield a single net return of 1210 at the end of year 2, with no scrap value. What is its marginal efficiency of capital, and should it be built if the market interest rate is 8%?
B. 10%; yes, because it exceeds 8%
Solve 1000 = 1210/(1 + r)^2: (1 + r)^2 = 1.21, so r = 10%. As MEC > 8%, the investment is profitable. 21% is the undiscounted total return and 10.5% is a simple average, both of which ignore compounding. The timing of returns is already in the MEC, so it is not a reason to reject.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The marginal propensity to save is 0.2. If autonomous investment rises by 50, by how much does equilibrium income rise in the simple Keynesian model?
B. 250
k = 1/MPS = 1/0.2 = 5, so dY = 50 x 5 = 250. 10 multiplies by the MPS; 62.5 divides by the MPC; 50 ignores the multiplier.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The goods market is described by IS: Y = 1000 - 50r and the money market by LM: Y = 500 + 50r, where r is the interest rate in percent. What are the equilibrium interest rate and income?
D. r = 5%, Y = 750
Set 1000 - 50r = 500 + 50r, so 100r = 500 and r = 5. Then Y = 500 + 50 x 5 = 750 (the IS equation gives the same). r = 10 comes from dividing 500 by 50 only; Y = 1250 adds instead of subtracting in IS; r = 2.5 divides by 200, and IS then gives Y = 875.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
Using Okun's law with a coefficient of 2, if unemployment is 7% and the natural rate is 5%, what is the output gap?
D. -4%
Output gap = -2 x (u - u*) = -2 x (7 - 5) = -4%: output is 4% below potential. Forgetting the coefficient gives -2%; the sign must be negative when unemployment is above its natural rate. -1% divides by the coefficient instead of multiplying.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The 'stagflation' of the 1970s was difficult to explain with the original Phillips curve because
A. inflation and unemployment rose together, contradicting a stable inverse relation
The original curve implies that higher inflation comes with lower unemployment. Supply shocks (oil prices) and rising inflation expectations shifted the short-run curve upward, producing both at once, which supported the expectations-augmented view.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
The United States Federal Reserve's statutory mandate is usually described as a 'dual mandate' of
A. maximum employment and stable prices
The Federal Reserve Act directs the Fed to promote maximum employment, stable prices and moderate long-term interest rates; the first two are called the dual mandate. The ECB, by contrast, has price stability as its primary objective.
Further reading: Dornbusch, Fischer and Startz, Macroeconomics; Mankiw, Macroeconomics
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