Macro

Income & Employment

Medium

In the excess demand condition, which of the following measures may be adopted in the economy to control it?

(A) Increase in repo rate.

(B) Decrease in reverse repo rate.

(C) Sale of government securities in the open market.

(D) Increase in subsidies.

Choose the correct answer from the options given below:

(A) and (D) only

(A) and (C) only

(B) and (C) only

✅ Correct Option: 2

Option 1 -> Increase in repo rate is contractionary but increase in subsidies is expansionary, so this combination is incorrect.

Option 2 -> Increase in repo rate makes borrowing costlier, reducing money supply. Sale of government securities absorbs money from circulation. Both are contractionary measures to control excess demand.

Option 3 -> Sale of securities is contractionary but increase in subsidies is expansionary, so this combination is incorrect.

Option 4 -> Decrease in reverse repo rate encourages banks to lend more (expansionary). Sale of securities is contractionary. Mixed measures, so incorrect.

Hence, Option 2: (A) and (C) only -> Excess demand creates inflationary pressure when aggregate demand exceeds aggregate supply. To control it, contractionary monetary policies are needed. Increasing repo rate makes borrowing expensive, discouraging credit creation and reducing money supply. Selling government securities in open market operations withdraws money from circulation as buyers pay for these securities. Both measures reduce liquidity and aggregate demand in the economy, effectively controlling excess demand. In contrast, decreasing reverse repo rate and increasing subsidies are expansionary measures that would worsen excess demand. -> correct

2025: 28 May Shift 2

Match List-I with List-II

List-I	List-II
(A) MPS	(I) $C/Y$
(B) MPC	(II) $\bar{C} + cY$
(C) APC	(III) $1 - c$
(D) Consumption function (C)	(IV) $\Delta C/\Delta Y$

Choose the correct answer from the options given below:

2022: 19 July Shift 2

Assume a two sector economy in the above diagram, the initial demand curve $AD_1$ shifts upward to $AD_2$ due to :

2025: 16 May Shift 1

Put the alternatives given below in the sequence in which they occur to reach the equilibrium level of out put given that aggregate demand falls short of aggregate supply.

(A) In this case, the firm has to run down existing inventories, which will lead to a fall in production and hence income.

(B) Stocks will be piling up in the warehouses, causing unintended accumulation of inventories.

(C) Ex- ante demand for final goods falls short of the output of final goods that the producers have planned to produce in a given year.

(D) process continues till Ex- ante demand for final goods equals to ex -ante output of final goods

Choose the correct answer from the options given below:

2026: 12 May Shift 1

If the Marginal Propensity to Save (MPS)=0.2.The Value of the multiplier will be-

2022: 19 July Shift 2

__________ can never be negative while __________ can have value as 1.

2025: 30 May Shift 1

Arrange the following steps in the correct sequence to explain the working of Multiplier.

(A) Increase in income and consumption.

(B) Increase in investment.

(D) Generation of additional income.

Choose the correct answer from the options given below:

Solution

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