Management Development Institute Gurgaon
Name of the Programme: PGDM
Mid-Term Examination Term-___ (Academic Year: ___2023-24_____)
Course Name: Macroeconomic Environment and Policy (MEP)_______________________
Section _________A____________________
Type of Exam: Closed Book
Time: 2 hrs Max Marks: __30____
Weightage__30%__
Instructions: a. This question paper contains ____3____ Pages,
b. Possession and use of Mobile / Laptop is prohibited,
c. Only Non-Programmable calculator can be used /No calculator
be used,
d. Be to the point in your response/answers,
e. State assumptions made, if any,
f. Marks are indicated in the right hand parenthesis against
each question,
g Any Other Instructions, please specify:
1._Part A Question 1 is compulsory_for all students
2._Attempt four questions in Part B. No credit for an extra
question attempted. The last question shall not be evaluated in such cases.
Questions……………6…………………
PART A: Compulsory question (5+5)
1. This question has two parts
a. The entire world economy has faced steep rise in inflation rate in year 2022 mainly
caused by Energy prices. However the world output declined. What kind of inflation the
world economy faced? Analyze the situation with a graph of AD-AS?
b. What is the likely impact of Israel war on the rest of the world? What macroeconomic
variables get impacted by this in both inside and outside Israel? How do you think the
rest of the world should cope up with this crisis? Explain with appropriate diagrams.
PART B: Answer any 4 questions from 2-6.
2. This question has two parts (3+2)
a. Economists sometimes prefer to use GNP rather than GDP as a measure of economic
well-being. Which measure should we prefer if we are analyzing the total income of
domestic residents? Which measure should we prefer if we are analyzing the total amount
of economic activity occurring in the economy?
b. The GDP of a closed economy was $8 trillion, direct taxes were $1.5 trillion, private
savings were $ 0.5 trillion and public savings were $0.2 trillion. Assume the economy is
closed, calculate consumption, government purchases, national saving and investment.
3. Suppose the government borrows 5 million more next year than this year in an open
economy framework (4+1)
a. Use an Aggregate supply-and-demand diagram to analyze this policy. Does the
interest rate rise or fall? What happens to investment? To private savings? To public
saving?
b. If the MPC is 0.8 and proportional income tax rate is 0.2 in a closed economy, then
what shall be the value of government expenditure multiplier?
4. Governments that have implemented major cuts in higher rates of income tax have been
accused of giving more money to the rich at the expense of the poor. Construct an
argument to counter such an accusation.
5
5. This question has two parts ( 3+2)
a. Suppose that a borrower and a lender agree on the nominal interest rate to be paid on
a loan. Then inflation turns out to be higher than they both expected. Is the real
interest rate on this loan higher or lower than expected? Does the lender gain or lose
from this unexpectedly high inflation? Does the borrower gain or lose?
b. What is inflation tax?
6. Suppose that a fall in consumer spending causes a recession. (2+3)
a. Illustrate the changes in the economy using a Phillips curve diagram. What happens
to inflation and unemployment in the short run.?
b. Now suppose that over time expected inflation changes in the same direction that
actual inflation changes. What happens to the position of the short–run Phillips
curve? After the recession is over, does the economy face a better or worse set of
inflation-unemployment combinations?
