Money And Inflation

When a bank has no excess reserves, it may borrow reserves from other banks to meet its reserve requirements.

Banks typically manage their reserves to ensure they can cover withdrawals and meet regulatory requirements.

Borrowing reserves from other banks is one of the strategies they use in such cases.

Hence, the correct answer is (b).

The Phillips curve shows an inverse relationship between inflation and unemployment.

As unemployment rises, the bargaining power of labor unions decreases, leading to lower wages and inflation.

Hence, the correct answer is (b).

(A) Higher aggregate demand leads to increased prices, causing *demand-pull inflation*.

(B) Higher cost of production increases the cost of goods, leading to *cost-push inflation*.

(C) Higher international food and fuel prices can push up domestic prices, leading to inflation.

(D) Higher taxes and reduced subsidies can increase costs, leading to inflation.

Thus, all four statements are correct. Hence, the correct answer is (c).

The typical order of rates from lower to higher is:

1. (D) Reverse Repo Rate (lowest)

2. (A) Repo Rate

3. (C) Deposit Rate

4. (B) Lending Rate (highest)

Thus, the correct order is (a).

In the *Mundell-Fleming model*, with perfect capital mobility and a flexible exchange rate, the money supply can increase without affecting the interest rate.

Capital flows freely across borders, balancing the domestic and international interest rates, so the rate of interest remains constant.

Hence, the correct answer is (d).

The expected return in India is 10%, so the investment would grow to 100 Million USD × 1.10 = 110 Million USD.

However, the exchange rate change results in a devaluation of the rupee (Rs.88 per USD compared to Rs.80), which eliminates the profit when converted back to USD.

Therefore, the profit in USD is zero. Hence, the correct answer is (a).

(A) *Money supply is exogenously given.* This is a core tenet of Monetarism, which is independent of demand.

(B) *Money supply is demand-driven and credit-led.* This aligns with the Post-Keynesian school, as money.

(C) *Rational expectation.* This is a key component of the Non-classical school, which assumes agents anticipate policy effects rationally.

(D) *Supply creates its own demand:* This is Say's Law, a principle within classical economics.

Thus, the correct matching is: (A) - (III), (B) - (I), (C) - (IV), (D) - (II). Hence, the correct answer is (d).

Purchasing power parity (PPP) theory suggests that in an open economy:

(B) The exchange rate between two countries is determined by the relative price levels.

(C) The law of one price holds, meaning identical goods should have the same price when expressed in the same currency.

(D) The price levels in all countries should equal when measured in terms of a common currency.

Thus, the correct answer is (d).

In classical economics, it is believed that the economy is self-adjusting, and changes in the nominal money supply only affect prices in the long run, rather than output. An increase in the nominal money stock increases the amount of money in circulation, which in turn shifts the aggregate demand curve to the right, causing an increase in the price level. - (A) An increase in output: In classical economics, an increase in the money stock does not lead to an increase in output in the long run because the economy is assumed to be at full employment.
- (B) Shift in aggregate demand curve to the left: This is incorrect. An increase in the nominal money stock shifts the aggregate demand curve to the right, not to the left.
- (C) No change in the price level: This is incorrect. According to classical economics, an increase in the money supply leads to higher prices in the long run.
- (D) Shift in aggregate demand curve to the right: This is the correct answer. An increase in the nominal money stock leads to an increase in aggregate demand, shifting the aggregate demand curve to the right, which results in higher prices in the economy.
The correct answer is (D), as an increase in the nominal money stock leads to a rightward shift in the aggregate demand curve in classical economics. Final Answer: (D) Shift in aggregate demand curve to the right.