(IGNOU) MEC 102 Important Questions with Answers English Medium- MEC-102 stands for Macroeconomic Analysis, a core course in the Master of Arts (Economics) program offered by Indira Gandhi National Open University (IGNOU). It is a first-year course that covers the fundamental concepts and theories of macroeconomics, equipping students with the ability to analyze and understand economic phenomena at the national and global levels.
Course Content
- Unit 1: The Classical Approach: This unit introduces the classical school of thought in macroeconomics, focusing on concepts like Say’s Law of Markets, full employment, and natural rate of interest.
- Unit 2: The Keynesian Model: This unit delves into John Maynard Keynes’s revolutionary theory of aggregate demand and supply, analyzing factors like consumption, investment, and government spending in influencing economic output and employment.
- Unit 3: Neoclassical Synthesis: This unit explores how the Keynesian model was integrated with classical principles to form the neoclassical synthesis, leading to the IS-LM model for analyzing equilibrium levels of income and interest rates.
- Unit 4: Open Economy Macroeconomics – I: This unit focuses on the complexities of open economies, including international trade, balance of payments, exchange rate determination, and their impact on macroeconomic aggregates.
- Unit 5: Open Economy Macroeconomics – II: This unit builds upon the previous one by exploring the challenges of managing open economies in the face of external shocks, capital flows, and monetary and fiscal policy adjustments.
1. What is the effect of monetary expansion on output and interest rates in an open economy with perfect capital mobility under flexible exchange rate?
(IGNOU) MEC 102 Important Questions with Answers English Medium- In an open economy with perfect capital mobility and flexible exchange rates, monetary expansion can have several effects on output and interest rates.
Output (Real GDP)
- Short Run: Initially, a monetary expansion tends to increase output and stimulate economic activity. As the money supply expands, interest rates typically fall, encouraging borrowing and spending by consumers and businesses. This can lead to an increase in investment and consumption, boosting overall output. (IGNOU) MEC 102 Important Questions with Answers English Medium
- Long Run: In the long run, the impact on output is less certain. It depends on various factors such as expectations, supply-side conditions, and how households and businesses respond to changes in monetary policy. If the increase in the money supply is perceived as temporary, the long-run impact on output may be limited.
Interest Rates
- Short Run: A monetary expansion usually leads to lower interest rates. As the central bank injects money into the economy, the supply of money increases. With a higher supply of money, the interest rate tends to fall because borrowers demand less compensation for the increased availability of funds.
- Long Run: In the long run, the impact on interest rates may be influenced by factors such as inflation expectations, fiscal policy, and global economic conditions. If the monetary expansion is expected to result in higher inflation, interest rates may rise over time as lenders demand higher compensation for the eroding purchasing power of money.
Exchange Rates
(IGNOU) MEC 102 Important Questions with Answers English Medium- A monetary expansion in an open economy with flexible exchange rates can also affect the exchange rate. In the short run, lower interest rates resulting from monetary expansion may lead to a depreciation of the domestic currency. Investors may seek higher returns in other currencies, causing capital outflows.
In the long run, the exchange rate can be influenced by a variety of factors, including inflation differentials, relative economic performance, and expectations. If the monetary expansion leads to concerns about higher inflation in the domestic economy compared to other economies, it may contribute to a depreciation of the domestic currency over time. MEC 102 Important Questions Answers
Effectiveness of monetary policy in influencing output, interest rates, and exchange rates can be subject to various complexities and uncertainties. Expectations play a crucial role, and the actual impact may depend on how households, businesses, and financial markets anticipate and react to the monetary policy actions. Additionally, other economic policies, such as fiscal policy and structural reforms, can also interact with monetary policy in shaping overall economic outcomes.
2. Comment on the effectiveness of monetary policy in open economies in light of your answer to Question 1 above.
3. What is the effect of fiscal contraction (cut in tax rate) on output and interest rates in an open economy with perfect capital mobility under flexible exchange rates?
4. What is the effect of fiscal contraction (cut in tax rate) on output and interest rates in an open economy with perfect capital mobility under fixed exchange rate?
5. Comment on the effectiveness of fiscal policy in open economies in light of your answer toquestion 1 above.
6. What will be the nature of change in the IS curve if there is a decrease in the propensity to consume?
7. Explain how the LM curve is derived.
8. Suppose the LM curve is vertical. What are its implications?
9. In the IS-LM model, explain how adjustment to supply shocks takes place.
10. Explain how the AD curve is derived?
11. Point out the factors that influence the position and slope of the AD curve.
12. Discuss the main features of the Keynesian consumption function.
13. State the reasons for the inverse relationship between interest rate and investment level.
14. Distinguish between autonomous investment and induced investment.
15. Discuss some of the factors that influence the demand for money.
16. What is speculative demand for money? How does it affect the slope of the money demand function?
17. What is meant by ‘liquidity trap’? What are its implications?
18. Discuss the role of the government in an economy that is facing a prolonged recession.
19. Give any three reasons why policy makers tend to be concerned about mounting budget deficits.
20. What are the main features of new-classical economics?