Macro Economics Case Study Examples – 02

Macro Economics Case Study Examples

Case Study (1-4)

The Balance of Payment (BoP) sharply jumped to $7.057 billion in the fourth quarter of 2013-14 from $2.68 billion in the same period in 2013-13, RBI data showed. For the full year, the BoP stood at $15.459 billion up from $3.83 billion in FY13. Total capital amount moderated to $9.195 billion in the March quarter from $23.787 billion in the December quarter.

The account deficit narrowed sharply to $1.2 billion or 0.2% of GDP in Q4 of GY14 from $18.1 billion or 3.6% of GDP a year ago. In the December quarter, CAD stood at $4.2 billion or 0.9% of GDP. The lower CAD was primarily on account of a decline in the trade deficit as a decline in imports was sharper than the exports.

In FY14, the current account deficit narrowed to 1.7% of GDP, or $32.4 billion, from 4.7%, or $87.8 billion in the previous fiscal.

“Contraction in the trade deficit, coupled with a rise in net invisible receipts, resulted in a reduction of the CAD to $32.4 billion in FY14,” the RBI said.

The merchandise trade deficit, on a BoP basis, contracted by about 33% to $30.7 billion in Q4 from $45.6 billion in the corresponding quarter a year ago. On a Bop basis, there was a net accretion of $7.1 billion to foreign exchange reserves in Q4 as compared to $19.1 billion in the preceding quarter.

                                                                The Economic Times; May 26th, 2014

Q1) Foreign exchange transactions that are independent of other transactions in the Balance of Payment Account are called ________________ (autonomous/accommodating) transactions. (Choose the correct alternative)

Ans.) Autonomous transactions

Q2) ‘Gifts and remittances to abroad’ are recorded on the: (Choose the correct alternative)

  1. Credit side of Current Account 
  2. Debit side of Capital Account
  3. Debit side of Current Account
  4. Credit side of Capital Account

Ans.) (c) Debit side of Current Account

Q3) Imports of goods and services raise the _______ (demand/supply) of foreign exchange. (Choose the correct alternative)

Ans.) Supply

Q4) Excess of export of goods over the import of goods is called________. (Choose the correct alternative)

  1. Balance of Trade
  2. Balance of Payments
  3. Both (a) and (b)
  4. Neither (a) nor (b)

Ans.) (d) Neither (a) nor (b)

Case Study (5-8)

At the macro level, inflation indices are not constructed for the sake of it. They are of fundamental importance in assessing the state of an economy at any given point in time. Rise inflation is inferred as an indication of emerging supply-side constraints. Deflation, on other hand, suggests a collapse in demand.

These situations require different policy interventions. A demand shock is needed when inflation starts rising. This could be in the form of an interest rate hike or rationing. A deflationary economy will need a stimulus. This could be given via direct cash transfers or a cut in interest rates, which would then lower the cost of consumption and investment. The RBI is mandated to use policy rates to achieve a balance between growth and inflation.

                                                                  Hindustan Times; August 24th, 2020

Q5) A rise in inflation is inferred as an indication of emerging ____________ (demand/supply) side constraints. (Choose the correct alternative)

Ans.) Demand

Q6) The two key constraints of aggregate demand are___________. (Choose the correct alternative)

  1. Consumption and Investment 
  2. Investment and growth
  3. Both (a) and (b)
  4. Neither (a) nor (b)

Ans.) (a) Consumption and Investment

Q7) ‘Decrease in bank rate’ is a part of _____________ (quantitative/qualitative) instruments. (Choose the correct alternative)

Ans.) Quantitative

Q8) Which of the following is not a reason for excess demand? (Choose the correct alternative)

  1. Fall in the propensity to consume
  2. The rise in aggregate demand
  3. Increase in investments
  4. Deficit financing 

Ans.) (a) Fall in the propensity to consume

Case Study (9-12)

The government of India has decided to ban the import of air conditioners (AC)- both split and window. India has amended the import policy of air conditioners with refrigerants from free to prohibited, the Directorate General of Foreign Trade said in a notification on October 15th, 2020, as the nation aims to promote domestic manufacturing and cut imports of non-essential items.

This adds to the list of curbs on imports of certain new pneumatic tires used in motor cars, buses, and motorcycles. Besides, prohibitions were placed on imports of items ranging from televisions to select defense equipment. India’s move to ban imports of air conditioners to hurt large listed AC makers such as Voltas Ltd., Blue Star Ltd., and Havells India Ltd. But companies such as Mitsubishi and Toshiba, which depend on regional sourcing from Thailand, are likely to take a hit.

                                                              Business Standard; October 17th; 2020

Q9) Excess of imports of goods over the export of goods is known as ________ (trade deficit/trade surplus). (Choose the correct alternative)

Ans.) Trade Deficit

Q10) ‘Import of air conditioners’ is recorded as __________ item in the current account because it does not change any liability or an asset. (Choose the correct alternative)

  1. Visible
  2. Invisible 
  3. Both (a) and (b)
  4. Neither (a) nor (b)

Ans.) (a) Visible

Q11) Excess of export of goods over the import of goods is known as ______ (trade deficit/ trade surplus)

Ans.) Trade Surplus

Q12) Export and import of goods is also known as :(Choose the correct alternative)

  1. Visible trade
  2. Invisible trade
  3. One-sided transactions
  4. None of these

Ans.) (a) Visible Trade

Case Study (13-16)

RBI governor Dr. Shaktikanta Das on Friday announced a series of steps to boost liquidity in a stimulus worth 3.2% of GDP to counter the economic impact of the coronavirus outbreak. RBI reduces the repo rate by 75 basis points to 4.4% and the Reserve repo rate by 90 basis points to 4%.

The Cash Reserve Ratio (CRR) of all banks has been reduced by 100 basis points to 3% of net demand and time liabilities with effect from the fortnight beginning March 28 for a period of 1 year.

Reserve repo rate cut more so that banks are incentivized to lend, RBI governor said. RBI will also inject liquidity worth Rs. 3.74 lakh crores into the system. He also predicted a big global recession and said India will not be immune. Aggregate demand may weaken and ease core inflation.

                                                                The Time of India; March 27th, 2020

Q13) Decrease in Cash Reserve Ratio by Reserve Bank of India will lead to a __________ (rise/fall) in aggregate demand. (Choose the correct alternative)

Ans.) Rise

Q14) In a situation of ‘inflationary gap’ at full employment level of income: (Choose the correct alternative)

  1. Aggregate demand > Aggregate supply
  2. Aggregate demand < Aggregate supply
  3. Aggregate demand = Aggregate supply
  4. None of these

Ans.) Aggregate demand > Aggregate supply

Q15) Cut in Repo Rate by Reserve Bank of India is likely to ________ (increase/decrease) the demand for goods and services in the economy. (Choose the correct alternative)

Ans.) Increase

Q16) When at full employment level of income, aggregate demand is lesser than aggregate supply, it is termed as ________. (Choose the correct alternative)

  1. Inflationary gap
  2. Deflationary gap
  3. Excess demand
  4. None of these

Ans.) Deflationary gap

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