Description

Macro Economics

Dec 2026 Examination

 

Q1 A country reports a significant increase in its national income during the year. However, a closer examination shows that a substantial part of the increase is associated with higher depreciation of capital assets and increased indirect taxes. At the same time, foreign companies operating within the country have earned considerable profits and transferred a portion of these earnings abroad. Despite the reported increase in national income aggregates, households have not experienced a comparable improvement in their economic well-being. Critically analyze how GDP, GNP, NDP and NNP can provide different interpretations of the country’s economic performance in the above scenario. Evaluate which national income measure would provide a more meaningful assessment of the income accruing to the country’s residents and explain why policymakers should avoid relying on a single national income aggregate while assessing economic well-being. (10 Marks)

Ans 1.

Introduction

This country’s national income looks stronger this year. The underlying numbers tell a more complicated story. Higher depreciation, rising indirect taxes, and profits leaving with foreign companies all inflate the headline figure without actually reaching households. A single aggregate like GDP cannot capture this gap between reported growth and real resident well-being. GDP, GNP, NDP, and NNP each adjust for a different piece of this puzzle, from foreign income flows to capital wear and tax effects. Picking the right measure here is not a technical formality, it directly determines whether policymakers understand what is actually happening to

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Q2 (A) A central bank is weighing the use of open market operations and changes in reserve requirements to control a moderate rise in inflation. Some policymakers argue for aggressive measures to swiftly curb inflation, while others caution that overly restrictive moves could undermine lending, investment, and growth. The public is concerned about both the erosion of savings and potential job losses. Financial institutions warn that too rapid a change could destabilize the banking sector, but consumer groups demand urgent action to protect purchasing power. Critique the use of open market operations and reserve requirement changes as tools for inflation control in this scenario. Weigh the risks and benefits from the perspectives of financial stability, economic growth, and consumer welfare. Recommend how the central bank could improve its approach, justifying your reasoning in light of competing objectives and potential trade-offs. (5 Marks)

Ans 2(A).

Introduction

Inflation is rising moderately, and the central bank must respond. Open market operations and reserve requirements are the tools on the table. Competing concerns about growth, savings, and bank stability make this a genuinely difficult call.

Concept and Application

Open Market Operations Would Work Like This

Selling government securities withdraws money from circulation, tightening liquidity and

 

 

Q2 (B) An economy is experiencing a slowdown characterized by weak consumer demand, declining private investment, rising unemployment, and sluggish economic growth. In response, the government proposes increasing expenditure on infrastructure and providing targeted tax relief to households. However, policymakers are concerned that these measures may increase the fiscal deficit and government borrowing. Analyze how the proposed fiscal policy measures could help revive the economy. Evaluate the potential benefits and risks of adopting an expansionary fiscal policy in this situation and recommend an appropriate fiscal policy approach. (5 Marks)

Ans 2(B).

Introduction

Demand is weak, investment is falling, and unemployment is rising. The government wants to spend its way out through infrastructure and tax relief. The real question is whether the deficit risk is worth the recovery it could bring.

Concept and Application

Infrastructure Spending Would Revive the Economy This Way

Government infrastructure spending directly injects demand into construction, materials, and