What is Macroeconomics?

Correct answer: B. Both can affect aggregate demand and income distribution

Explanation: Government expenditure directly adds to aggregate demand, while taxes influence households’ disposable income and therefore consumption. Both instruments can also change the distribution of income and affect incentives. Their combined budgetary impact is consequently essential for evaluating fiscal policy.

Correct answer: B. Because a supply shock can affect production costs and productive capacity

Explanation: A supply shock originates on the production side, for example through higher energy prices, damaged infrastructure or shortages of inputs. It can raise firms’ costs, reduce output and increase the general price level simultaneously. Therefore, analysing only demand would miss the source and mechanism of the disturbance.

Correct answer: B. The difference between actual and potential output

Explanation: The output gap compares actual real output with the level of production the economy could achieve sustainably with normal utilisation of resources. A negative gap suggests slack and underused resources, while a positive gap may signal demand pressure and an overheating risk. It is therefore a useful macroeconomic indicator.

Correct answer: D. Stability of the income flow

Explanation: Leakages such as saving, taxes and imports withdraw purchasing power from the circular flow, while injections such as investment, government expenditure and exports add spending. When leakages equal injections, planned expenditure is balanced and the level of income remains stable in the simplified circular-flow model.

Correct answer: B. When the problem is also linked with a supply constraint or capacity limit

Explanation: Demand-management measures can increase spending, but they cannot by themselves remove shortages of labour, raw materials, energy, technology or productive capacity. If supply is constrained, stronger demand may mainly raise prices rather than real output. This demonstrates the need to consider supply conditions with demand policy.

Correct answer: A. Prices, wages and productive capacity respond differently over time

Explanation: In the short run, wages and some prices may be slow to adjust, so a policy can strongly influence output and employment. Over a longer period, wages, expectations, prices and productive capacity may adjust, changing the final result. Therefore, time horizons are essential in macroeconomic policy analysis.

Correct answer: C. It examines total income, output and demand relationships in the economy

Explanation: Equilibrium in one market concerns the interaction of demand and supply for a particular good. Aggregate equilibrium concerns consistency among economy-wide income, production, expenditure and employment. Changes in one aggregate can influence others through the circular flow, so macroeconomic equilibrium has a broader scope.

Correct answer: A. If everyone saves more, aggregate consumption and demand may fall.

Explanation: Saving can be prudent for one household because it creates financial security. However, if all households reduce consumption simultaneously, firms may face lower sales, reduce production, and employ fewer workers. This fall in aggregate demand is the fallacy of composition, so individual and economy-wide effects may differ.

Correct answer: D. There will be upward pressure on the general price level.

Explanation: When the economy is already operating near full productive capacity, firms cannot expand real output indefinitely. A sharp increase in aggregate demand may therefore compete for limited resources, raise wages and input costs, and create excess demand. The likely macroeconomic result is upward pressure on the general price level.

Correct answer: B. Interest rates, aggregate demand, output, and prices.

Explanation: An increase in money supply can influence liquidity and interest rates. Lower interest rates may encourage borrowing, consumption, and investment, thereby raising aggregate demand, output, and possibly the price level. The size and direction of the effect depend on expectations, spare capacity, and the state of the economy.

Correct answer: A. One person gains by saving more, but if everyone saves more, demand falls

Explanation: Option A illustrates the fallacy of composition, commonly called the paradox of thrift. More saving by one household may improve its financial position, but if all households reduce consumption simultaneously, aggregate demand, production and income may fall. Thus, an individual conclusion need not hold for the economy as a whole.

Correct answer: C. What is the difference between domestic product and national income?

Explanation: Domestic product measures production within a country's territory, regardless of who owns the factors of production. National income adjusts domestic product by adding net factor income from abroad. Therefore, a fall in net income from abroad can reduce national income even when domestic production rises, showing why domestic and national concepts must be separated.

Correct answer: C. Conducting a comprehensive macroeconomic study

Explanation: National income, inflation, unemployment, external-sector outcomes and economic policy are all economy-wide subjects. Studying them together examines aggregate performance, interactions among major macroeconomic variables and policy outcomes. That broad, interconnected approach distinguishes macroeconomics from the study of one consumer, firm or product market.

Correct answer: D. ₹820 crore

Explanation: For a non-market government institution, gross value of output is generally measured by the sum of production costs. Here, total cost is employee compensation + intermediate consumption + depreciation = 590 + 185 + 45 = ₹820 crore. ₹775 crore excludes depreciation and therefore represents an incomplete total; ₹635 crore excludes both depreciation and the relevant cost treatment. Thus, option D is correct.