CAIIB ABM BUSINESS MATHEMATICS

BUSINESS MATHEMATICS
MCQs on Time Value of Money
1.Money has a time value is shown by which of the following concepts:
a: market value b: face value c: present value d: b and c
2 The cash inflow is called:
a: negative cash flow
b: positive cash flow
c: balanced cash flow d. b or c
3 The cash outflow is known as :
a: negative cash flow
b: positive cash flow
c:balanced cash flow d. a or c
4 A cash flow of future has less value due to which of the following (which is not correct):
a: present consumption is preferred over future consumption
a: money value gets eroded due to inflation
a: receipt of cash in future is subject to uncertainties
b: none of the above
5 The process through which the future cash flows are adjusted is called:
a: discounting
b: compounding
c:balancing
d: any of the above
6 The rate at which the present and future cash flows are traded off (exchanged), is called:
a: interest rate
b: discount rate
c:compounding rate
d: yield to maturity
7 If inflation rate is higher in an economy, the
discount rate should generally:
a: be lower
b: be higher
c: be stable
d: be fluctuating
8 If there is lower level of uncertainty about future
cash flows, the discount rate should generally:
a: be lower b: be higher c: be stabled: be fluctuating
9 A lower discount rate leads to ________ present
value for the future cash flows:
a: stable b: higher c: lower d: fluctuating
10 Cash flows of different points of time can be compared or aggregated by:
a: converting them to future flows
b: brining them to the same point in time
c: converting them to standard flows d. a or b
11. Which of the following is not a type of cash flow:
a: simple cash flow
b: annuities or growing annuities
c: perpetuities or growing perpetuities
d: future yields to maturities
12 A single cash flow in a specified future time period is called:
a: simple cash flow
b: annuities
c: perpetuities
d: growing annuities
13 The process in which a present cash flow is converted in to its expected future value is called:
a: discounting b: compounding c: balancing d: any of the above
14 Present value can be calculated as ________
C i, where C 1 means the expected payoff at period 1
a: compounding factor
b: discount factor
C: interest factor
d: yield factor
15 Value today of Re 1 to be received in future is called:

a: present value
b: compound factor
c: discount factor
d: yield factor
16 Discount factor is denoted by which of the following:
a: 1 / (1-r) b: 1 / (1+r) c: 1 x (1-r) d: 1 x (1+r)
17 X is expecting a cash flow of Rs.10 lac at the end of one year. At 8% discount rate, what is the present value:
a: 952692 b: 962592 c: 925926 d: 925962
18 Present value — required investment = ?
a: discounted value
b: compounded value
c: net present value
d: future value
19 X is expecting a cash flow of Rs.10 lac at the end of one year for his investment of Rs.8 lac in a housing property. At 8% discount rate, what
is the net present value:
a: 152692 b: 125926 c: 162592 d: 125962
20 C 0 / {C 1 / (1+r)} (where C 0 represents cash flow at time 0 i.e. today and C1 at the end of one year), stands for:
a: present value
b: net present value
c: future value
d: discounted value
21 Real cash flow =________/ (1 + inflation rate)
a: actual cash flow
b: nominal cash flow
c: present cash flow
d: future cash flow
22 Z decides to invest Rs.4 lac in an immovable property that fetches him Rs.5 lac, at the end of an year, what is his return (use
the formula profit / investment):
a: 10% b: 15% c: 20% d: 25%
23 An investment opportunity can be availed where the net present value is _:
a: zero
b: negative
c: positive
d: none of the above
24 An investment opportunity can be availed where the rate of return is their cost of capital:
a: less than, discount
b: more than, opportunity cost c. less than, opportunity cost, d: more than, discount
25 Future value of a simple cash flow = x (1+r) t
where r is discount rate:
a: future cash flow called CF
b: present cash flow called CF
c: discounted cash flow called CF 0
d: none of the above
26 With the help of formula (1 + stated annual interest rate) n / N ) 1 (where N stands for no. of compounding periods say semiannual
=2 and monthly = 12) which of the following can be calculated:
a: discounted value
b: nominal interest rate
c:effective interest rate
d: yield to maturity
27 The rate of interest is 8% and compounding is semi-annual, what will be effective interest rate:
a: 8%
b: 8.16%
c: 8.25%
d: 8.32%
28 If the rate of interest is 10% and compounding is annual, what will be the effective interest rate:
a: 10%
b: 10.25%
c: 10.47%
d: 10.5171
29 If the rate of interest is 10% and compounding is semi-annual, what will be the effective interest rate:
a: 10% h: 10.75% c: 10.47%d: 10.5171
30 If the rate of interest is 10% and compounding is monthly, what will be the effective interest rate:
a: 10% b: 10.25% c: 10.47% d: 10.5171
31 If the rate of interest is 10% and compounding is continuous, what will be the effective interest rate:
a: 10% b: 10.25% c: 10.47% d: 10.5171
32 A continuous cash flow that occurs at regular interval of time is called:
a: future value b: present value c: perpetuity d: annuity
33 Present value of annuity can be calculated by use of which of the formula: (where A = annuity, r=discount rate n = no. of years, g=
expected growth rate - a: PV (A, g,n) b: PV (A, r,n) C: PV (A, r,g) d: PV (g, r,n)
34 What is the present value of Rs.180000 which is paid every year over a period of 5 years by assuming the rate of interest at 12%:

a: 348680 b: 346880 c: 348860d: 384860
35 Future value of an end-of-the-period annuity can be calculated as:
a: FV (A, r, g) b: FV (A, g, n) c: FV (A, g, r) d: FV (A, r, n)
36 A loan for which only interest is paid during its repayment period while the principal is repaid at the end is called:
a: term loan
b: interest demand loan
c: lump-sum payment loans
d: balloon repayment loan
37 Which of the following is an example of a balloon repayment loan:
a: bonds and debentures
b: bonds and term loans
c: debentures and term loans
d: all the above
38 A fund which is created by companies to make
payment of balloon repayment loans by regular annual contributions to have adequate funds at the end of the period, when
repayment falls due is called:
a: reserve fund balloon fund
c: sinking fund
d: repayment fund
39 A cash flow that grows at a constant rate for a specified period of time is called:
a: annuity
b: perpetuity
c: growing annuity
d: growing perpetuity
40 Present value of a growing annuity for n years can be calculated, where r=9:
a: growing annuity x no. of periods over which cash flows are to be received or paid
b: annuity x no. of periods over which cash flows are to be received or paid
c: growing perpetuity x no. of periods over which cash flows are to be received or paid
d: none of the above.
41. A constant flow paid or received at regular time intervals for ever is known as:
a: annuity
perpetuity
c: growing annuity
d: growing perpetuity
42 A bond that has no maturity and pays a fixed coupon (or rate of interest) is called:
a: long term bonds
b: perpetual bonds console bonds
d: non-repayable bonds
43 A cash flow that is expected to grow at a constant rate forever, is called:
a: annuity
b: perpetuity
C: growing annuity
d: growing perpetuity
Answers
01 c 02 b 03 a 04 d 05 a
06 b 07 b 08 a 09 10 b
11 d 12 a 13 b 14 b 15 c
16 b 17 c 18 c 19 b 20 b
21 b 22 d 23 24 b 25 b
26 c 27 b 28 a 29 b 30 C
31 d 32 d 33 b 34 c 35 d
36 d 37 a 38 c 39 c 40 a
41 b 42 c 43 d

caiib ABM MCQs 1

1) Micro-economic theory studies how an economy determines.
a)The price of goods b)The price of services c)The price of economic resources d) All of the above.
2) A producer's positively sloped supply curve for a commodity represents. a)In one sense a maximum and in another sense a minimum
boundary of the.producer's intentions. b)A maximum boundary of the producer's intentions.c)A minimum boundary of the producer's
intentions. d)None of the above.
3) The theory of distribution refers to: a)The distribution of income among various factors of the production. b)The distribution of income
among different individuals in the economy. c)Both of the above d)None of these
4) Interest is reward for parting with liquidity according to: a) B. Ohlin b) Von Haberler c) J.M. Keynes d) Alfred Marshall
5) Economics may be divided into macro-economics and micro-economics. Among the subject matter of micro economics may be found: a)The
nature of value in exchange.b)The size of a country's national income c)The allocation of resources among competing uses d) The relative prices
of specific services.
6) The statement that'economics is positive and not normative' means:
a)That economics can be used to prove that capitalism is better than socialism.b)That economics tells us what kind of economic behaviour or
policy is wholesome and what evil c)That economics tells policy makers which alternative to choose from among several efficient ones. d)That
economics can only indicate consequences of policies, choices, or conditions.
7) Which of the following statements is incorrect? a)Micro-economics is primarily concerned with the problem of what, how and for whom to
produce.b)Micro-economics is primarily concerned with the behaviour of individual decision making units when at equilibrium.c)MiCroeconomics
is primarily concerned with the time path and process by which one equilibrium position evolves into another d)Micro-economics is
primarily concerned with comparative static rather dynamics.
8) Economic laws may be described as: a)Principles derived from analysis of price input / output determination. b)Generations concerning the
economic behaviour of individuals and institutions.c)Forecasts in quantitative terms of the economic development of society.d)Expression of the
basic features of competition.
9) The main difference between positive economics and normative economics is that the former. a)Discusses the ethical implications of its
laws.b)Concerns itself only with hypotheses which can generally be tested.c) Is based on the value judgements of economists.d)Considers
carefully the political significance of its laws for a democratic society.
10) Adam Singh advocates: a) Laissez-faireb) Division of Labour c) Both of the above d) None of the above
11) The term'consumer goods' is used by economists to refer to: a) Goods produced for consumers in a free market only.b) Goods other than
free goods, whose use directly satisfies consumers wants.c) Goods produced by consumers in return for a wage.d) Goods which are used by
consumers in order to earn their living
12) The basic characteristic of a Capitalistic economy is: a) Full employment b) The private ownership of the means of production.c) An absence
of monopoly d) Large-scale production in primary industries.
13) In a free capitalist society the allocation of the factors of production among the various productive activities is determined by: a) The pattern
of consumer's spending b) The traditional employment of Locals c) Decisions of the Government d) The wealth of the entrepreneurs.
14) Who believed that an automatic equilibrating mechanism of the perfectly competitive market, known as'invisible hand' tended to maximize
national wealth: a) Adam Smith b) Keynes c) J.B. Say d) None of the above
15) The fundamental economic problem being faced is one of: a) Consumer's choice b) Decision-making by the governmentc) 'Multiplicity of
wants and scarcity of resources.d) Shortage of labour.
16) Which one of the following is not directly the concern of the economist? a) Aid to underdeveloped countries b) The effect of an increase in
Bank rate c) The choice between alternative sites for a factory d) The use of taxation to discourage smoking of cigarettes.
17) The meaning of the word'economic' is most closely connected with the word: a) Free b) Scarce c) Unlimited d) Restricted
18) Which of the following is not an economic problem?
a) Deciding between extra paid work and extra leisure. b) Deciding between different ways of spending leisure lime . c) ;:eciding on the level and
form of personal saving d) Deciding between expenditure on one good and another.
19) Which one of the following statement is not true?
a) Exchange is one method of helping to solve the basic economic problem. b) The basic ecolomic problem is one of choice.c) Choice is necessary
because of Limited wants.d) The means to satisfy wants i.e., the factors of production, are limited.
20) Who gave scarcity definition of economics? a) Adam Smith b) Robbins c) Keynes d) J.B. Say
21) Who is known as the Father of Economics? a) Keynes b) Ricardo c) Adam Smith d) J.S. Mill
22) Many of the basic problems of economics emerge from:
a) Unlimited resources b) Incompetent govt. c) The use of limited resources to satisfy human wants d) Unlimited wants
23) The utility may be defined as: a) The power of a commodity to satisfy wants b) The desire for a commodity c) The usefulness of a commodity
d) The necessity of a commodity
24) The utility of a commodity is: a) Its expected social value b) Its relative scarcity c) The extent of its practical use d) The degree of its fashion
25) Marginal utility curve of a given consumer is also his: a) Indifference curve b) Demand curve c) Supply curve d) Total utility curve
26) The total utility is maximum when: a) MU is zero b) AU is the highest c) MU is the highest d) MU is equal to AU
27) The law of diminishing marginal utility states that:
a) As more of a commodity is consumed total satisfaction diminishes.b) The more you have of a particular commodity the less you want more of
it. c) As more units of a commodity are produced the price of the commodity will fall d) The consumption of further units of a commodity will
bring a steady thcrease in the amount of satisfaction obtained.
28) The law of diminishing returns or increasing cost will operate at an earlier level, in agriculture than in industry because:
a) More mechanization is applicable to agriculture b) Agriculture is an industry where land is used extensively c) Less mechanization is applicable
to agriculture. d) More labour is used in agriculture.
29) Opportunity costs are also known as: a) Spillover costs b) Alternative cost c) Social costs d) Money costs
30) An increase in the price‘of a commodity, other things remaining same, results in:
a) Increase in pricing b) Increases in quantity supplied c) Increase in demand d) Taxes
31) Supply remaining constant, if demand increases, price will a) Rise b) Remains constant c) Fluctuate d) Fall
32) Perfect competition is said to exist if: a) There are homogenous products b) Each firm in the industry accepts the market price because it has
to accept it. c) Price is fixed not by a firm d) All of the above
33) Consumer's surplus is highest in case of: a) Luxuries b) Necessities c) Comforts d) Conventional necessities.
34) A "Giffen Goods" is one for which, in response to a small change in price. a) A zero income effect is just outweighed by a positive substitution
effect. b) A negative income effect is just outweighed by a positive substitution effect. c) A zero income effect is matched by a zero substitution
effect. d) A negative income effect outweighed any'substitution effect.
35) Which is correct?
a) An "increase of demand" is not the same thing as an "extension of demand". b) An "increase of demand is the same thing as an "extension of
demand". c) An increase of demand is just equal to the extension of demand. d) All the above statements are wrong e) An increase of demand
invariably reduces the extension of demand.
36) Demand means: a) The desire and willingness of an individual for all goods and services for his standard of living. b) The desire, ability and
willingness of an individual to purchase goods and services at a given time and price c) Both A and B d) None of the above
37) The demand function for a commodity is defined as: a) Quantity demanded as a function of the goods, own price, the price of the substitute
and the buyer's income b) Price of Substitutes as a functions of the goods own prices c)Quantity demanded as a function of tne price of other
goods d) All the above
38) In the typical demand schedule, quantity demanded.
a) Varies directly with price.b) Varies proportionately with price c) Is independent of price d) Varies inversely with price
39) Law of demand states that when:
a) Income rises demand rises.b) Price rises demand rises.c) Price falls demand falls.d) Price falls demand rises
40) The law of demand indicates: a) The relationship between income and quantity demanded b) The relationship between price of a
commodity and price of ifs cubstitutes c) The relationship between price of two commodity.d) The relationship between the price of commodity
and the quantity demanded.
41) Which of the following conditions is required condition for the operation of law of demand? a) Price of subStitute change,,,b) Income and
Taste of consumer remains constant c) Production does not increase d) Taste of the consumer change
42) Demand curve shows:
a) Inverse relationship between quiantitydemailed and its cost of production.b) Inverse relationship between the rate of change of demand and
price.c) Inverse relationship between the rate of change in demand and cost of production at a given times. d) Direct relationship between the
demand and the price of a commodity at a given time.
43) When we say that a demand curve for a commodity slopes downwards to the right we mean: a) More of the commodity will be demanded
as income increase b) More of the commodity will be demanded as the price of the substitutes falls. c) More of the commodity will be
demanded as population rise.d) More of the commodity will be demanded as its own price falls.
44) A fall in the price of a commodity leads to:
a) A shift in demand b) A fall in demand c) A fall in the consumers real income d) A rise in the consumers real income
45) An exceptional demand curve is one that slopes: a) Upward to the lift b) Upward to the right c) DoWnward to the right d) Horizontal
46) Which one is not an exception to the Law of Demand? a) Ignoranceb) Inferior good c) Normal good d) Articles of Distinction
47) Demand for a commodity is elastic when has:
a) Only one use b) Many Use c) Uses, which cannot be postponed d) Uses very essential for the consumer
48) Which of the following pairs of commodities is an example of substitute:
a) Coffee and milk b) Mustard oil and coconut oil c) Diamond and cow d) Pen and ink
49) For most customers apples and oranges are substitute goods. Therefore, we would expect a rise in the price of apples to lead to: a) A
rightward shift in the supply curve of oranges b) A leftward shift in the supply curve of oranges. c) A fall in the price of oranges d) An upward
change in the demand curve of oranges.
50) A change in climate ,conditions resulting in hot weather, price remaining the same, would cause a consumer of cold drinks: a) To move to a
lower curve b) To move lower down the demand curve c) To move to a higher demand curve d) To move up the same demand curve
51) When an individual's income falls (while everything else remains the same) his demand for an inferior goods:
a) Increase b) Remaining unchanged c) We cannot say without additional information d) Decrease

a) Increase b) Remaining unchanged c) We cannot say without additional information d) Decrease
17 | P a g e
52) A fall in the price of a commodity whose demand curve is a rectangular hyperbola causes total expenditure on the commodity to: a) Remain
unchanged b) Increasec) Decrease d) Any of the above
53) The relationship between demand for a commodity and price, ceteris paribus, is:
%a) Negative b) Positivec) Non-negative d) Non-positive
54) Other things being equal a decrease in the quantity supplied to the market at given prices leads to:
a) A higher price and a contraction of demand b) A higher price and an expansion of demand. c) A higher price and an expansion of demand d) A
lower price and a contraction of demand.
55) Law of demand explains: a) Quantitative relationship between price and demand b) Qualitative relationship between price and demand c)
Relationship between demand and supply d) Rate of change in price and demand
56) We can say with certainty that when the demand for TVs increases in the long run, prices:
a) Will go down b) Will go up c) Change proportionately d) Cannot be predicted with the knowledge of elasticity of demand
57) In the normal demand schedule, quantity demanded:
a) Varies directly with price b) Is independent of price c) Varies inversely with price d) Varies proportionately with price
58) An example of derived demand is demand for: a) Pen and ink b) Wool and mutton c) Petrol and Car d) None of the above
59) By increase in demand we mean: a) Movement upwards on a demand curve b) Movement downwards on demand curve c) Shifting
upwards of a demand curve d) None of these
60) Law of demand operates because of
a) Price changes b) The principle of different income c) Changes in advertisement expenses d) None of the above
61) Multiple uses of a commodity will make the demand go up when:
a) Price increases b) Price remains the samec) Price falls down d) None of the above
62) Status symbol goods are: a) Veblen goods b) Exception to law of demand c) Goods of conspicuous consumption d) ALL OF THE ABOVE
63) Price - demand relationship in the case of Giffen goods is: a) Inverse b) Direct c) Absent d) None of the above
64) The downward sloping demand curve may be partly explained by the "income effect" which refers to:
a) People's tendency to save more as their real incomes fall in the short period. b) An increase or decrease in the amount of a good purchased
because of a price-induced change in the purchasing power of a fixed income. c) Changes in the relative importance of good purchased because
of changes in the con imunity's tastes resulting from adverting. d) Changes in the distribution of income in a community.
65) The demand curve for a commodity is generally drawn on the assumption that:
a) The commodity has no substitutes b) Tastes, income and aii other prices remain constant. c) The average household consist of two persons d)
Purchases of the commodity are made by a free market.
66) A fall in the price of a commodity leads to:
a) A shift in demand b) A fall in demand c) A rise in consumer's real income d) A fall in the consumer's real income.
67) In the case of Giffin good like Bajra a fall in its price tends to:
a) Make the demand remain constant b) Reduce the demand c)Increase the demand d)Change demand in an abnormal way.
68) Which of the following pairs of commodities is an example of substitutes:
a) Coffee and milk b) Diamond and cow c) Pen and ink d) Mustard oil and coconut oil.
69) For most consumers apples and oranges are substitute goods. Therefore, we would expect a rise in the price of apples to lead to: a) A
rightward shift in the demand curve of oranges b) A leftward shift in the supply curve of apples c) A downward change in the demand curve of
oranges d) A fall in the price of oranges
70) A change in climatic conditions resulting in hot weather, price remaining the same, would cause a consumer of cold drink: a) To move to a
higher demand curve b) To move up the same demand curve c) To move lower down the curve d) To move to a lower demand curve.
71) If two goods are complementary, this means that a rise in the price of one commodity will induce:
a) An upward shift in demand for the other commodity b) Arise in the price of the other commodity c) A downward shift in demand for other
commodity d) No shift in demand for the other commodity.
72) If more is demanded at the same price or same quantity at a higher price, this fact of demand is known as:
Extension of demand b) Increase of demand c) Contraction of demand d) Decrease of demand.
73) Other things being equal a decrease in demand can be caused by: a. rise in the price of the commodity
b) A rise in the income of the consumer c) A fall in the price of the commodity d) A fall in the income of the consumer
74) An increase in demand can result from: a) A decline in market price b) An increase in income c) A reduction in the price of substitutes d) An
increase in the price of complementary goods e) All the above
75) Which of the following circumstances would be likely to bring about a change in the demand schedule for a product?
a) A fall in the price of the product b) An increase in the number of potential consumers c) A new method of producing the product d) An
increase in the quantity produced. e) Both a &b
76) If the price of good A affects the demand for good B, then: a) A is a substitute for B b) B is complement of A c) Changes in the price of A will
cause movement along the demand schedule for A d) Changes in the price of B will not change the demand for A. e) Changes in the price of A
will shift or change the demand for B.
77) Cross demand is the change in the quantity demanded of a given commodity in response to the:
a) Change in the utility of another commodity b) Change in the price of another commodity c) Change in the nature of another commodity d)
Change in the size of another commodity.
78) The law of demand states that: a) Demand increases with increase in income b) When income and prices rise. the demand also rises c)
When income and prices rise. the demand also rises d) When price increases, demand increases
79) A consumer's equilibrium choice or position is one at which:
a) His savings are maximised b) His assets are maximised c) His satisfaction is maximum d) Price of goods is maximised
80) For most consumers, milk and tea are substitute goods. Therefore, we should expect a rise in price of milk to lead to:
a) A rightward shift in the supply curve of tea. b) A leftward shift in the supply curve of tea. c) A fall in the price of tea. d) An upward shift in the
demand curve for tea.
81) Other things being equal, a fall I contraction in demand can be caused by a: a) Rise in prices of the substitute
a) Rise in prices of the substitute b) Rise in prices of the substitute c) Rise in the income of the consumer d) Rise in the price of the commodity
82) The demand for a good is elastic if:
a) The demand for that good increases when price falls b) A decrease in price results in a decrease in total expenditure c) The quantity
demanded increases less than proportionately with the decrease in price level
83) A rightwards shifts in supply schedule indicates:
a) A decrease in Supply b) A decrease in quantity supply c)An increase in quantity supply d) An increase in supply.
84) A rightwards shift in supply curve indicates:
a) A decrease in supply b) An increase in quantity supplied c) An increase in supply d) None of the above
85) A supply curve will generally take an upwardsslopin9 form left to right because:
a) Market price is normally above total costs of production. b) Consumers' income tend to increase in the long period. c) Producers' costs
tend 'to increase as their output expands d) Supply of most goods is essentially a short-term phenomenon.
86) Other things being equal an increase in supply can cause by:
a) A rise in the price of the commodity b) An improvement in the techniques of production c) A rise in the income of the consumer d) An
increase in the income of the seller.
87) The shift of the supply curve for a commodity to the left may indicate, other things being equal, that:
a) Shares in the producing firms are in great demand on the Stock Exchange. b) Producers of the commodity wish to make and sell less at same
price. c) Prices raw materials used in the production of the commodity have fallen. d) Wages paid to the producers' employees have fallen.
88) Ceteris paribus, a decrease in quantity supplied of a commodity can be caused by:
a) A fall in its price b) Fall in income c) Rise in price d) Fall in raw material
89) The supply schedule for a commodity is usually assumed to be directly open to influence by all the following except:
a) The quantity demanded b) The prices of the factors of production c) The costs of production d) The prices of other goods
90) Which of the following could explain why the supply curve for a commodity slopes downwards?
a) Producers do not like increasing production. b) Producers have to lower price to induce consumers to buy more c) Costs fall as production
increases d) Diminishing marginal utility is in operation
91) "Free Trade Area" denotes: a) Pitlicy of Laissez faire b) A group of countries which have decided to impose no duties of any kind on imports
from other members of the group c) Free Exports & Imports d) All the above
92) Temporary control of inflation can be effected by:
a) Lowering Bank Rate b) Purchasing of securities by RBI c) Restraint on the growth of money supply d) None of these
93) The term "hyper-inflation" is used to denote: a) Creeping inflation b) Step by step inflation c) A "Runaway" or "galloping" inflationary
situation where the monetary unit becomes almost worthless d) None of these
. 94) In calculating a country's GNP at market prices one of the following is not included:
a) Depreciation b) Net factor income from abroad c) Net indirect taxes d) Transfer Payment
95) Indian Economy can be best described as:
a) Developed economy b) Undeveloped economy c) Developing economy d) Underdeveloped
96) The term "balance of trade" means: a) Difference between exports & imports b) Net Exports including merchandise c) The difference
between the cost of the imports and exports of a country. d) a and c
97) The open market operations refer to the sale and purchase by the RBI of:
a) Foreign exchange b) Gold c) Government securities d) All c' the above
98) At full employment level, which of the following would be most likely to lead to inflation?
a) A fall in taxation with no changes in gevemment expenditure b) An increase in productivity without any increase in wages c) A fall in
investment with no change in prosperity to consumer d) A rise in the prosperity to save with no change in investment
99) Deflation is: a) Deficit budget b) Reduction in taxation c) Contraction in volume of money or credit that results in a decline of price level d)
Increase in public expenditure
100) Bank rate means: a) Interest rate charged by moneylenders, b) Interest rate charged by the scheduled banks c) Rate of profit of the banking
institution d) The official rate of interest charged by the central bank of the country Micro-economic theory studies how an economy
determines.


ANSWER
1 D 2 A 3 A 4 C 5 D 6 D 7 A 8 B 9 B 10 C
11 B 12 B 13 A 14 C 15 C 16 C 17 C 18 B 19 C 20 B
21 C 22 C 23 A 24 B 25 B 26 A 27 B 28 B 29 B 30 B
31 A 32 D 33 B 34 B 35 A 36 B 37 A 38 D 39 D 40 D
41 B 42 B 43 D 44 D 45 B 46 C 47 B 48 B 49 D 50 C
51 D 52 A 53 A 54 D 55 C 56 D 57 C 58 D 59 C 60 A
61 C 62 D 63 B 64 B 65 B 66 C 67 B 68 D 69 A 70 A
71 C 72 B 73 D 74 B 75 E 76 E 77 B 78 C 79 C 80 D
81 D 82 C 83 D 84 C 85 C 86 D 87 B 88 A 89 A 90 C
91 B 92 C 93 C 94 D 95 C 96 D 97 D 98 A 99 C 100 D

CAIIB ABM MCQs 2

1) In the Keynes model above, which is independent:
a) Investment b) Consumption c) National income d) Consumption and investment
2) How many motives for demanding money has been given by Keynes: a) 1 b) 2 c) 3 d) 4
3) Recession is associated with fall in: a) Demand b) Supply c) Disinvestment d) Investment
4) Devaluation means: a) Fall in Marginal utility of Money b) Fall in printing of currency c) Risk in black money d) Fall in the value
of money in terms of foreign currency
5) Acute inflationary situation: a) Makes savings in the form of bank deposits less attractive b) Makes savings more attractive c)
Arises due to liquidity trap d) All the above
6) Inflation means: a) Increase in price b) Decrease in value of money c) Boom d) All of the above
7) The problem of unemployment in rural areas is mainly due to: a)Seasonal and under employment b) Frictional unemployment
c) Structural unemployment d) Technical Lriernpleyrnent
8) NNP for a given year can be defined as: a) Market value of final goods only b) The market value of all final goods and services c)
The market value of all final services only d) None of the above
9) LiqUidity preference is the term, which is used to refer to: a) The Reserve Bank of India's shareholdings in other financial
institutions b) The extent to which investors prefer to keep their assets in money c) The community's preference for a goldbacked
currency d) An inducement to save.
10) Which of the following are among the major determinants of the interest rate in the Keynesian theory?
a) People's desire to hold money and to keep their wealth in liquid form b) The available stock of money c) The intensity of
speculation on the stock exchange d) The value of gold and silver on the world's markets
11) The famous book written by J.M. Keynes is entitled: a) Principles of Economics b) Law of Markets c) The General Theory of
Employment, Interest and Money d)None of the above.
12) To a layman, investment means putting his money in a financial asset like bonds, fixed deposit etc. What does it mean to an
economist: a) Purchase of machines b) Stock of durable goods c) Purchase of real capital assets d) All of the above
13) The liquidity preference arises due to: a) Transaction Motive b) Precautionary Motive c) Speculative Motive d) All of these
14) Liquidity trap is likely to result when: a) Rate of Interest at its lowest b) Rate of Interest at its highest c) No change in supply
of money d) When an increase in the supply of money fails to reduce the rate of interest
15) Which theory is called the Neo-Classical theory of rate of interest?
a) Risk Theory b) Liquidity Preference Theory c) a and b d) Loanable Funds Theory.
16) The agency estimating the National Income of India is:
a) Reserve Bank of India b) Planning Commission c) Ministry of Finance d) Central Statistical Organisation
17) The goals of monetary policy do not include a) Maximum output b) Full ernploymeot
c) Price stability ,d) Maximum tax revenue
18) Gross National Product (GNP) is: a) The total output of goods and services produced by the country's economy b) The total
domestic and foreign output claimed by residents of the country c) The sum of gross domestic product and investment d)
National income minus national expenditure
19) If an economy is in equilibrium at the point where plans to save and to invest are equal, then government expenditure must
be: a) Curtailed b) Equal to government income c) Increased d) None of the above


20) Which of the following is correct regarding the gross domestic savings in India?
a) Contribution of corporate sector is largest b) Contribution of government sector is the largest c) Contribution of household
sector is the largest d) None of these
21) NNP (Net National Product) or National Income is the money value of
a) Final goods and services produced annually in the economy b) Annual service generation in the Economy
c) Tangible goods produced annually in the economy d) Tangible goods available in the economy
22) Which of the following is included in the calculation of gross domestic product? a) Personal consumption expenditure b)
Gross domestic investment c) Purchase by the government d) All of the above
23) Gross National Product is greater than gross domestic product when: a) NFI (from abroad) > 0 b) NFI < 0 c) NFI = 0,d) NFI = -1
24) Which of the following is deducted from gross national product in order to estimate net national product?
a) Depreciation b) compensation of employees c) expenditure on buildings d) expenditure on raw material
25) Changes in the standard of living in a country are best reflected in changes in the: a) Social Welfare b) Economic
Welfare c) Per capita income at rent prices d) Per capital income at constant prices
26) Whicl: is the primary indicator to recognise a country's rate of economic growth? a) Increase inter per capita income b)
Setting of more industries c) Rate of growth in national income More exports
27) NationalIncome is based on: a) Total Production x prices b) Rent + wages + Interest,+ Profit c) Domestic Income + NFI d) The
sum of all factor incomes e) All the above
28) Net National Production excludes:
a) Gross Investment b) Netinvestment c) Foreign Investment d) Replacement investment
29) Here are four statements about various national income / expenditure I product relationships. Which one of the following is
true: a) GNP less NIT = NNP b) GNP less NFI = NNP c) GNPplus depreciation = NNP d) GNP less depreciation allowances = NNP
30) The term GDP incorporates the economic activity: a) Taking place within the geographical boundary of the country b) Within
the land territorial c)Within water territorial d) Within air space
31) The term "Hindu rate of growth" refers to the 3.5% per annum growth rate achieved by the Indian economy over the first six
Five-Year Plans. The term was coined by a) Chakravaty b) J.N. Bhagwati c) Raj Krishna d) K.N. Raj
32) Essential services owned and controlled by government is called:
a) Public monopoly b) Public utility c) Public Sector d) All of the above
33) Which of the following is not a fiscal monopoly?
a) Printing of currency b) Minting of coins c) Electricity supply d) None of the above
34) In a planned economy the economic problem of what shall be produced is determined primarily by:
a) Computers deciding what consumers want. b) Direction by the oovernment. c) The pattern of consumer's spending d) The
independent decisions of entrepreneurs.
35) Development means economic growth plus: a) Price stability b) Social change c) Inflation d) Deflation
36) Which Plan recommended Zero-Based Budgeting (ZBB) as a step to control public expenditure?
a) Fifth Plan b) Sixth Plan c) Seventh Plan d) Eighth plan
37) All revenues received, loans raised and money received in repayment of loans by the Union Government go into. a) Public
Account of India b) Contingency Fund in India c) Consolidated fund in India d) none of the above
38) Which one of the following is not directly the concern of the economist? .a) Choices relating to location of a steel plant b)
Bargaining between the workers' unions and the employers c) Effects of a change in money supply. d) Imposition of tax to
discourage cigarette smoking
39) Customs duties, export duties, corporation taxes, taxes on capital value of assets (excluding agricultural land of individuals
and companies) ate: a) Taxes and duties levied by the Centre but wholly appropriated by the States b) Taxes and duties levied by
the Centre but collected by the States c) Taxes and duties that accrue wholly to the Union Government d) Taxes levied and
collected by the Union but which are shared with the States.
40) "Funded debt" means: a) All Government securities which are marketable on the stock exchange market b) All private
securities c) Shares of Companies d) KisanVikasPatras
41) "Annual Financial Statement" is another name of:
a) Balance of payment b) Fiscal Budget, c) Budgetd) Debt & Credit
42) "Multi-Currency Basket" means: a) Relationship with world bank b) Currency + coins c) Number of major international
currencies to which the external value of the Indian rupee is linked d) None of the above
43) Which of the following is not a seiective credit control measure?
a) Rationalizing of Credit b) Open market observations c) Changes in the statutory liquidity ratio d) a and -c
44) Public finance is said to be: a) Science of taxes and pending b) Science of demand and supply of money c) Science of money
and cost d) Science of income and expenditure
45) One of the distinctions between public finance and private finance is that:
a) The State adjusts "income to expenditure' while an individual adjusts "expenditure to income" b) The State maximizes the

general welfare of the public while an individual maximizes his own satisfaction c) The State has no coercive powers while the
individual has d) The State cannot borrow money while the individual can get loans
46) A tax takes away a higher proportion of one's income rise is termed is:
a) Proportional Tax b) Indirect Tax c) Regressive Tax d) Progressive Tax
47 Co orate tax is imposed by:
a) Local Government b) Central Government c) State Government d) Both Central and State Government
48) Which of the following are direct taxes? a) Gift tax b) Income tax c) Corporation tax d) All of the above
49) From the following, which is not a direct tax?
a) Tax on wealth b) Tax on entertainment c) Tax income d) Tax on expenditure
50) An Direct tax is one where: a) Tax is levied always on property b) Points of impact and incidence are different c) Tax is levied
on wealth d) Points of impact and incidence are the same
51) The name of Indirect tax is: a) Income tax b) Sale tax c) Corporate tax d) Wealth tax
52) A regressive tax will tend to redistribute income more: a) Equally b) Equitably c) Unequally d) Inequitably
53) Which of the following does not grant any tax rebate?
a) Indira VikasPatra b) Public Provident Fund c) National Saving Scheme d) National SavingCertificate
54) The Indian Income tax is:
a) Direct and progressive b) Obssessive c) Indirect and proportional d) Direct and proportional
55) Temporary tax levied to obtain additional revenue is called: a) Fee b) Surcharge c) Cess d) Rate
56) Which of the following taxes is/are levied by the Central Govt. and collected appropriated by the States?
a) Estate Duty b) Stamp Duties c) Passenger and goods tax d) Taxes on Newspaper
57) Taxes raised are credited into:
a) Consolidated Fund b) Public Accounts c) Contingency Accounts ,d) Private Accounts
58) Generally tax on production are: a) Indirect taxes b) Both A and B c) Direct taxes d) None of the above
59) Tax on incomes is: a) Indirect b) Both A and B c) Direct d) None of the above
60) Which of the following taxes is levied on services?
a) Personal tax b) Value added tax c) Capital gains tax d) Corporate tax
61) Income tax is raised by:a) Local Government b) Central Government c) Municipality d) State Government
62) Sales tax is levied by: a) Local government b) State government c) Central government d) None of the above
63) Union Excise Duties are a part of Central Government's:
a) Tax revenue b) Capital receipts c) Non-tax revenue d) None of the above
64) All taxes come under: a) Capital receipts b) Revenue receipts c) Public debt d) Both A and C
65) In India, the States gets maximum income from:
a) Sales tax b) State Excise duties c) Land Revenue d) Agricultural Income tax
66) Progressive tax in India is: a) Income tax b) Wealth tax c) Corporate tax d) Sales tax
67) Which of the following is a direct tax? a) Sales tax b) Entertainment tax c) Excise duty d) Estate duty
68) Which of the most important source of revenue to the State Government of India ?
a) Land Revenue b) Agriculture Income-tax c) State excise duties d) Sales tax
69) A budget is the summary of:
a) Proper allocation of resources b) Income reallocation c) Resource reallocation d) Revenue and expenditure
70) The budget deficit refers to the difference between all-revenue and expenditure of: a) Revenue account only b) Increased
government expenditure c) Capital account only d) Both revenue and capital accounts
71) Borrowing from capital market is a part of: a) Revenue budget b) Capital budget c) Both a and b d) None
72) Revenue deficit in India is: a) Negative b) Positive c) Zero d) None of 'he above
73) Capital deficit in India is: a) Positive b) Zero c) Negative d) None of the above
74) Funds, which do not belong to the government, are?
a) Consolidated fund b) Contingency fund c) Public accounts d) None of the above
75) Which budget in India is passed separately? a) Airlines b) Railways c) Defence d) Atomic energy
76) Which one of the following cannot be influenced by budgetary policy? a) Power of private monopolies
b) Balance of trade c) General level of prices d) Regional distribution of employment
77) Which budget is measured in financial terms only?
a) Dominance budget b) Programme performance budget c) Zero-base budget d) Central budget
78) Deficit Financing means: a) Government spends in excess of revenue and capital receipt to that budget deficit in incurred
which is financed by borrowing from the RBI. b) Difference of total expenditure & income revenue from all sources. c) Difference
in borrowing an internal and external resources d) Capital expenditure on items of public construction, public enterprises and
public borrowings.
79) The need for deficit financing in India arises due:

a) Failure of the government to mobilize the desired volume of surplus for the public sector plans. b) The rapidly growing
expenditure incurred by the government c) Neither A nor B. ' d) Both A and B
80) Deficit financing leads to: a) Inflation b) Capital formation c) Neither A nor B ?d) Both A and B
81) Deficit financing means: a) Difference in borrowing and internal and external resources b) Capital expenditure on items of
public construction, public enterprises and public borrowings c) Government spends in excess of revenue and capital receipts so
that budget deficit is incurred which is financed by borrowing from the RBI. d) Difference of total expenditure and income by
revenue from all sources
82) The effect of deficit financing is: a) Never inflationary b) Always inflationary c) Sometimes inflationary and sometimes not so
depending cn conditions of the economy and the dose of deficit financing.d) None of these
83) The direct effect of deficit financing is:
a) Deficit financing leads to extra money supply which in turn pushes up prices b) Demand and supply both increase c) The
price situation comes under complete control dj Deficit financing leads to extra money supply, which in turn makes market more
& more competitive.
84) Fiscal policy is related to: a) Exports and Imports b) Public revenue and expenditure c) Issues and circulation of currencies d)
Monetary Control measures
85) A restrictive monetary-fiscal policy is a good way to deal with:
a) Demand— shift inflation b) Any short of inflation that occurs when the economy falls below full employment c) Demand — pull
inflation d) Cost — push inflation
86) Grants—in-aid given by the Centre to the states is meant: a) To cover the gaps on revenue accounts. b) For flood control c)
Po( boosting agriculture in the State. d) For financing State plan projects
87) The finance commission is appointed every: a) 7 years b) 6 years 'C) 5 years d) 3 years
88) The Narsimham Committee submitted its report to the government on:
a) Depoliticising appointments in public sector undertakes b) Import and Export c) NPA d) Banking structure
89) "Interest is the reward for pure waiting." Which theory of interest explains it? a)Time Preference Theory b) Classical Theory c)
Liquidity Preference Theory d) Loanable Funds Theory
90) What is not true for the Classical theory of interest? a) Demand and Supply Theory b) Saving-Investment Theory c) Nonmonetary
Theory d) Monetary Theory of Interest
91) The Loanable Funds Theory of interest is also known as: a) The neo-classical theory of interest b) The classical theory of
interest c) The real theory of interest d) The modern theory of interest
92) Rate of interest is a function of I, S, M, r = f (I, S, M, L) is explained by which of the following theories? a)Liquidity Preference
Theory b) Saving-Investment Theory c) Loanable Funds Theory d) Modern Theory
93) For which of the following motives for liquidity preference, the demand for liquidity is determined by the rate of interest? a)
Transaction motive b) Precautionary motive c) Speculative motive d) All the three motives.
94) Which of the following is known as monetary theory of interest?
a) Loanable Funds Theory b) Modern Theory c) Liquidity Pi eference Theory d) Saving-Investment Theory
95) What is not true of the modern theory of interest?
a) Neo-Keynesian Theory b) Hicks and Hansen's synthesis c) Monetary Theory d) IS-LM Curves Analysis
96) Which of the following is not a c4Idracteristic of business cycles?
a) Recurrent in nature b) Periodicity c) Regular d) Cumulative
97) Who gave innovation theory of business cycles ? a) Pigou b) .1. A. Hobson c) Schumpeter d) J. Tinbergen
98) Which of the following assumptions is not correct in relation to Hicks' theory of business cycle ?
a) The equilibrium of the economy is influenced by changes in consumption and investment b) Fall employment is the ceiling of
expansion c) Autonomous investment increases at some constant rate even during depression d) Accelerator remains operative
in all phases of business cycle, but the multiplier stops operating during depression
99) Economic growth refers to :
a) An increase in per capita income at current prices b) A sustained increase in per capita output c) An increase in income and
output in real terms and not in money d) An increase in economic welfare
100) National income differs from NNP at market prices by the amount of : a) Current transfers from the rest of the world, b) Net
indirect taxes .9-) National debt interest, d) It does not differA
NSWER
1 A 2 C 3 A 4 D 5 A 6 B 7 A 8 B 9 B 10 C
11 C 12 C 13 D 14 A 15 D 16 D 17 D 18 B 19 B 20 C
21 A 22 D 23 A 24 AA 25 D 26 C 27 E 28 D 29 D 30 A
31 C 32 D 33 C 34 B 35 B 36 C 37 C 38 A 39 C 40 A
41 C 42 C 43 D 44 D 45 A 46 D 47 B 48 D 49 B 50 B
51 B 52 C 53 A 54 A 55 B 56 A 57 A 58 C 59 C 60 B
61 B 62 B 63 A 64 B 65 A 66 A 67 D 68 D 69 D 70 D
71 B 72 A 73 A 74 C 75 B 76 A 77 B 78 A 79 D 80 D
81 C 82 C 83 A 84 B 85 B 86 A 87 C 88 D 89 B 90 D
91 A 92 C 93 C 94 C 95 C 96 C 97 C 98 D 99 B 100 B

CAIIB ABM

Sampling Methods
1 Where items are included in a sample, based on the judgement of the person who is selecting the sample, it is called non-random.
(True/False)
2 The statistic is a characteristic of a population (True/False)
3 A sampling plan that selects members from a population at uniform intervals in time order or space is called stratified sampling.
(True/False)
4 As a general rule, it is not necessary to include a finite population multiplier in a computation for standard error of the mean when
the size of the samples is greater than 50. (True/False)
5 The probability distribution of all the possible means of samples is known as the sample distribution of the mean. (True/False)
6 The principles of simple random sampling are the theoretical foundation of statistical inference. (True/False)
Z The standard error of the mean is the standard deviation of the distribution of sample means (True/False)
8 A sampling plan that divides the population into well defined groups from which random samples are drawn is called as cluster
sampling. (True/False)
9 With increasing sample size, the sampling distribution of the mean approaches normality, regardless of the distribution of the

population (True/False)
10 The standard error of the means decreases in direct proportion to sample size. (True/False)
11 To perform a complete enumeration, one would need to examine every item in a population (True/False)
12 In everyday life, we see many examples of infinite populations of physical objects. (True/False)
13 To obtain a theoretical sampling distribution, we consider all the samples of a given size. (True/False)
14 large samples are always a good idea because they decrease the standard error. (True/False)
15 if the mean for a certain population were 15, it is likely that most of the samples we could take from that population would
have means of 15 (True/False)
16 the precision of a sample is determined by the no. of items in the sample and not the proportion of the total population that is
sampled. (True/False)
17 the standard error of a sample statistic is the standard deviation of its sampling distribution. (True/False)
18 judgement sampling has the disadvantage that it may lose some representativeness of a sample (True/False)
19 the sampling fraction compares the size of a sample to the size of the population. (True/False)
20 Any sampling distribution can be totally described by its mean and standard deviation. (True/False)
21 the precision with which the sample mean can be used to estimate the population mean decreases as the standard error
increases. (True/False)
22 Which of the following is a method of selecting samples from a population
a: judgement sampling b: random sampling c: probability sampling d: a and b but not c
23 Choose the pair of symbols that best completes this sentence : is a parameter, whereas is a statistics:
a: N, p b: a, S c: N, n d: all the above
24 In random sampling, we can describe mathematically how objective our estimates are. Why is this ?
a: we always know the chance that any population element will be included in the sample
b: every sample always has an equal chance of being selected
c: all the samples are exactly the same size and can be counted
d: none of the above e: a and b but not c
25 Suppose you are performing stratified sampling on a particular population and have divided it into strata of different sizes. How
· can you make your sample selection?
a: • select at random an equal no. of elements from each stratum
b: draw equal no. of elements from each stratum and weigh the results
c: draw no. of elements from each stratum proportional to their weights in the population
d: a and b only e: b and c only
26 In which of the following situations would a g=cr/Vn be the correct formula to use for computing:
a: sampling is from an infinite population
b: sampling is from a finite population with replacement
c: sampling is from a finite population without replacement
d: a and b only e: b and c only.
27 The dispersion among sample means is less than the dispersion among the sampled items themselves because:
a: each sample is smaller than the population from which it is drawn.
b: very large values are averaged down and very small values are averaged up
c: the sampled items are all drawn from the same population
d: none of the above e: b and c and not a.
28 Suppose a population with N = 144 has p = 24. What is the mean of the sampling distribution of the mean for samples of size 25:
a: 24 b: 2 c: 4.8 d: cannot be determined from the information given
29 The central limit theorem assures us that the sampling distribution of the mean :
a: is always normal
b: is always normal for large sample sizes
c: approaches normality as sample size increases
d: appears normal only when Nis greater than 1000
30 Suppose that for a certain population a it is calculated as 20 when samples of size 25 are taken and as 10 when samples of size 100 are
taken. A quadrupling of sample size, then, only halved a R. We can conclude that increasing sample size is:
a: always cost-effective b: sometimes cost•ef€ective
c: never cost-effective d: none of the above
31 For the above questions, what must the value of a for this infinite population
a: 1000 b: 500 c: 377.5 d: 100
32 The finite population multiplier does not have to be used when the sampling fraction is :
a: greater than 0.05 b: greater than 0.50 c: less than 0.50
d: greater than 0.90 e: none of the above
33 The standard error of the mean for a sample size of two or more is:
a: always greater than the standard deviation of the population
b: generally greater than the standard deviation of the population
c: usually less than the standard deviation of the population
d: none of the above
34 A broader patrol check point that stops every passenger van is using:
a: simple random sampling b: systematic sampling c: stratified sampling d: complete enumeration
35 In a normally distributed population, the sampling distribution of the mean:
a: is normally distributed
a: has a mean equal to the population mean
b: has a standard deviation equal to the population standard deviation divided by the square root of the sample size
c: both a and b
36 The central limit theorem:
a: requires some knowledge of the frequency distribution
b: permits us to use sample statistics to make inferences about population parameters

c: relates the shape of a sampling distribution of the mean to the mean of the sample
d: requires a sample to contain fewer than 30 observations.
Fill-in the blanks:
37 A portion of the elements in a population chosen for direct examination or measurement is a
38 the proportion of the population contained in a sample is the
39 is the process by which inferences about a population are made from information about a sample
40 The is the distribution obtained by finding the sampling distribution of all samples of a given size of a population.
41 sampling should be used when each group considered has small variation within itself but there Is wide variation between
different groups.
42 A method of random sampling in which elements are selected from the population at uniform intervals is called sampling.
43 ________is the degree of accuracy with which the sample mean can estimate the population mean.
44 Within a population, groups that are similar to each other (although the groups themselves have wide internal variation) are called
45 A sampling distribution of the proportion is a probability distribution of the
State whether the following is true or false
46: A rupee to be received in future has less value than a rupee available today (T/F)
47: Money has been invested in capital of a firm instead of investment in bonds. The return on bonds is called opportunity cost
of capital (T/F)
48: When there are inflationary conditions the discount rates are low (T/F)
49: Present value of a perpetuity is expressed as = 1/r (T/F)
46: The difference between cash outflows and present value of inflows is called net present value
(T/F) Answers
01 T 02 F 03 F 04 F 05 T
06 T 07 T 08 F 09 T 10 F
11 T 12 F 13 T 14 F 15 F
16 T 17 T 18 T 19 T 20 F
21 T 22 d 23 b 24 e 25 e
26 d 27 b 28 a 29 c 30 b
31 d 32 u 33 d Si d 35 d
36 b 37 sample 38 sample fraction 39 statistical
40 theoretical sampling distribution inference
41 stratified 42. systematic 43 precision 44 cluster 45 sample
46 T 47 T 48 F 49 T 50 T proportion
MCQs ON CORRELATION & REGRESSION
1 Coefficient of correlation is always , according to Karl Pearson:
a: plus or minus 1 b: plus 1
c: minus 1 d: 0
2 r = { xy /N ax ay refers to:
a: price index b: standard deviation
c: coefficient of correlation d: mean deviation
3 Where there is no correlation, the coefficient of correlation will be:
a: +1 b: -1
c: both d: none of the above
4 If two variables changes in the same ratio and in the upward direction, the correlation is said to be:
a: perfectly negative
a: perfectly positive
a: zero
b: negative
5 +1 refers to the coefficient of correlation being:
a: no correlation
b: negative correlation
a: positive correlation
c: perfect positive correlation
6 Correlation means which of the following:
a: measuring relationship between two variables
b: measures changes in prices
c: measuring average correlation between the variables
d: prediction
7 If r M -1, this means that there is:
e: positive correlation
b: negative correlation
b: perfectly positive correlation
c: perfectly negative correlation
8 If correlation is between + 0.9 and + 1, it means there is:
a: high degree of positive correlation
b: high degree of negative correlation
c: perfect degree of positive correlation
d: perfect degree of negative correlation
9 If the value of two series move in the opposite direction, there is:
a: perfect correlation b: positive correlation

c: negative correlation d: lack of correlation
10 Scatter diagram is used to :
a: determine the extent of correlation
b: know the direction of correlation
c: estimate the extent of rank correlation
d: none of the above
11 What is the correct value of coefficient of correlation:
a: there is nn limit of it
a: it is between plus or minus 1
b: it is greater than 1
c: it is less than 1
12 There is positive correlation between X and Y when:
a: X and Y both increase
b: X and Y both decrease
c: X increases and Y falls
d: Y increases and X falls
13 The probable error of correlation is:
a: 0.6745 of standard error
b: 0.6745 of correlation co-efficient
c: 0.6745 of standard deviation
d: none of the above
14 If two lines intersect each other at 90 degree angle, the co-efficient of correlation will be:
a: 0 b: -1 c: +1 d: none of the above
15 The relationship between price and supply is generally:
a: negative b: neutral c: positive d: linear
16 Between income and consumption there is generally:
a: no correlation b: positive correlation c: negative correlation d: partial correlation
17 Between ages of husbands and wives, there is generally correlation:
a: negative b: neutral c: zero d: positive
18 If two series move in the same direction, the correlation is said to be:
a: positive b: negative c: zero d: none of these
19 Study of relationship between three or more variables is known as:
a: multiple correlation b: simple correlation c: neither of the two
20 When we consider more than two variables, but consider only two variables to be influencing each other, the effect of other
influencing variable being constant, it is called:
a: multiple correlation b: partial correlation c: simple correlationd: none of the above
21 If the amount of change in one variable tends to bear constant ratio to the amount of change in other variable then the
correlation is said to be: a: linear b: non-linear c: none of the above
22 Correlation analysis deals with measurement of:
a: association between two ore more variables
b: degree of relationship between variables
c: co-variation between two or more variables
a: all the above
23 Correlation analysis tells:
a: degree of relationship between variables
b: cause and effect relationship between variables
c: none of the above
24 Correlation observed between variables that cannot conceivably be casually related is called:
a: spurious correlations
a: nonsense correlation
b: both a and b
c: none of the above
25 The study of tea and coffee is known as :
a: partial correlation b: multiple correlation c: simple correlation d: none of the above
26 When we study the relationship between the yield of rice per acre and both the amount of rainfall and fertilizers used, it
is a problem of:
a: multiple correlation b: simple correlation c: none of the above
27 The coefficient of correlation:
a: cannot be negative b: cannot be positive
c: can be positive
d: can be both positive or negative
28 Negative correlation implies that on an average as one variable is decreasing the other is:
a: decreasing b: increasing
c: neutral d: none of the above
29 If the amount of change in one variable does not bear a constant ratio to the amount of change in other variable, this
type of correlation is known as: a: linear b: non-linear c: scattered d: none of the above
30 Which is the non-mathematical method of studying the correlation between the variables:
a: scatter diagram method
b: graphic method
c: both the above
d: none of the above

31 If 'r' is more than 6 times the probable error, the correlation is:
a: negative b: positive c: significant d: none of the above
32 The coefficient of correlation describes:
a: magnitude of correlation
a: direction of correlation
b: both the above
c: none of the above
33 If sum of the product of deviations of X and Y series from their mean is Zero, the co-efficient of correlation shall be:
a: +1 b: 0 c: 1 d: none of the above
Answers
01 a 02 c 03 c 04 b 05 d
06 a 07 d 08 a 09 c 10 b
11 b 12 a 13 a 14 a 15 c
16 b 17 d 18 a 19 a 20 b
21 a 22 d 23 a 24 c 25 c
26 a 27 d 28 b 29 b 30 c
31 c 32 c 33 b
QUESTIONS ON REGRESSION ANALYSIS
1 Greater the value of r
a: better are the estimates obtained through regression analysis
b: worst are the estimates
c: really makes no difference
d: none of the above
2 When one regression co-efficient is negative, the other would be:
a: negative b: positive c: zero d: none of the above
3 If the variables are independent of each other:
a: r is zero
a: lines of regression are at right angles
b: both a and b
c: none of the above
4 Nearer the two regression lines from each other:
a: higher the degree of correlation
b: lesser the degree of correlation
c: neither a nor b
5 The more and more distance between two regression lines means:
a: higher degree of correlation
b: lesser the degree of correlation
c: none of the above
d: both the above
6 Value of correlation coefficient is:
a: 4bxy and byx
b: + or - bxy and by:c
c: none of the above
7 The regression lines cut each other at the point of:
a: average of X and Y b: Average of X only
c: Average of ? only d: none of the above
8 The regression line of Y on X:
a: minimize total of squares of the horizontal deviations b: total of the squares of the vertical deviations
c: both vertical and horizontal deviations d: none of the above
9 There will be only one regression line in case of two variables if:
a: r = 0 b: r = +1
c: r = -1 d: r is either +1 or -1.
10 The regression line of Y on X gives:
a: the most probable values of X for given value of Y b: the most probable value of Y for given value of X
c: either a or b d: none of the above
11 X on Y gives:
a: the most probable values of X for given value of Y b: the most probable values of Y for given value of X
c: any of the above d: none of the above
12 If byx = 0.6 andbxy= 1,3 then r+
a: 0.75 b: 0.73 c: 0.88 d: none of the above
13 Regression is:
a: measure of average relationship between 2 ore more variables
b: to find a relation between 2 or more variables that are related casually
c: any of the above
d: none of the above
14 Coefficient of correlation is under-root of two:
a: standard deviations b: mean deviations a regression coefficients d: none of the above

15 The farther the two regression lines cut each other:
a: the greater the degree of correlation , b. the lesser the degree of correlation c: does not matter d: none of the
above
16 Where r = 0, the regression line cut each other at:
a: an angle of 45 degree b: an angle of 60 degree c: an angle of 90 degree d: none of the above
17 The regression equation X or Y is shown as:
a: X = a + by b: Y = a + bx c: Ex --- a +.b Ey d: EXY=aN-EbEy2
18 The regression equation Y or X is shown as:
a: Y = a + bx b: Y = a + by c: Y = Na + b EX d: none of the above
19 If two regression lines are nearer to each other thEn there would be:
a: low degree of correlation
b: higher degree of correlation
c: no correlation
d: none of the above
20 If coefficient of correlation between two variables is zero, the regression lines will be:
a: coinciding each other b: parallel to each other c: perpendicular to each other d: none of the above
21 If bxy = 1.3 and byx = 1.5, r would be:
a: 1.256 b: 1.296 c: 1.315 d: 1.396
Answers
01 a 02 a 03 c 04 a 05 b
06 a 07 a 08 a 09 d 10 b
11 a 12 c 13 b 14 c 15 b
16 c 17 a 18 a 19 b 20 c 21 d
OBJECTIVE TYPE QUESTIONS ON TIME SERIES
1 Ups and downs in the economy due to trade cycles are called:
a: cyclical variations b: seasonal variations c: secular tends d: none of the above
2 Which one of the following is the indication of seasonal variation:
a: improvement in techniques b: demand of woolen clothes in winter
c: purchase of books during the beginning of the academic sessions d: none of the above
3 Y = ? in series:
a: TxS+C+1 b: T-S+C-1 c: T-SxCx1 d: TxSxCx1
4 The fluctuations which complete the whole sequence of change within the span of a year or has some pattern year after year is
known as:
a: secular trend b: seasonal variation c: cyclical fluctuation d: none of the above
5 Cyclical fluctuations are also known as ;
e: oscillatory variations b: business cycle fluctuations c: either a or bd: none of the above
6 The period of moving average is to be decided on the basis of :
a: length of the cycle b: policies of the company c: both the above d: none of the above
7 Method of [east squares is:
a: flexible in nature b: non-flexible in nature c: semi-flexible in nature d: none of the above
8 Method of least squares cannot be used to fit:
a: Gompertz curve b: logistic curve c: both the above d: none of the above
9 In shifting the trend origin, the value of 'b':
a: changes b: remains unchanged c: badly fluctuates d: either a or b
10 The moving average may constitute a satisfactory trend for a series that is of:
a: linear duration b: whose cycles are regular in duration c: both the above d: none of the
above
11 To convert an annual trend equation to a monthly basis, when original data are given as totals:
a: 'a' is divided by 12 and 'b' by 144 b: 'a' is divided by 12 and 'b' by 12
c: 'a' is divided by 144 and 'b' by 12 d: 'a' is divided by 144 and 'b' by 144
12 Changes that have taken place as a result of such forces that could not be predicted like floods etc. are known as:
a: seasonal variations b: erratic variation c: cyclical variation d: none of the above
13 Seasonal variations repeat during a period of:
a: 12 months b: 24 months c: 36 months d: 48 months
14 The most important factors covering seasonal variations are:
a: growth of population b: technological improvements c: change in fashions d: weather
15 Seasonal moments are:
a: repetitive b: predictable around the trend time c: trend value d: none of the above
16 The general movement persisting over long period is called:
a: secular trend b: seasonal trend c: trend value d: none of the above
17 The most widely used method of measuring seasonal variations is :
a: ratio to moving averages method b: ratio to trend method
c: link relative method d: method of simple averages
18 Irregular variations are caused by:
a: floods b: strikes c: wars d: all the above
19 A time series is a set of observations taken at specified time, usually at:
a: equal intervals b: unequal intervals c: only at short-term intervals d: none of the above
20 Which one of the following is a component of time series:

a: secular trend b: seasonal variations c: cyclical variations
21 In Yc = a + bx, if b is positive, it shows:
a: rising trend b: seasonal variations c: cyclical variations d: all the above
22 We find irregular variations due to:
a: lock outs b: transport bottlenecks c: floods d: all the above
23 How can be remove seasonal variations:
a: reducing prices in seasons b: introducing different products having different seasons
c: both the above d: none of the above
24 What is the sequence of the following phases in business (i) depression, ii) prosperity, iii) recovery, iv) recession):
a: ii, iv, i, iii b: iv, c: iv, i, ii, iii d: iii, ii, iv, i
25 Which period give more tangible trend:
a: shorter period b: long period c: medium period
26 The seasonal changes are always:
a: periodic but not regular b: not periodic c: periodic and regular
27 Which is the feature of prosperity:
a: inflation b; optimism c: high profits
Answers
01 a 02 b 03 d 04 b 05 c 06 a 07 a
08 c 09 b 10 c 11 a 12 b 13 a 14 d
15 c 16 a 17 a 18 d 19 a 20 d 21 a
22 d 23 d 24 a 25 b 26 c 27 d
Bond Valuation - Objective Type Questions
1.Bonds have a ____ maturity andvalue at maturity:
a.fixed, variable b. fixed, fixed c. variable, fixed d.variable, d.variable
2.Regular repayment in the form of interest on a bond is called:
a.discount, b.interest c.coupon d. dividend
3.On 8%, 5 year bond of Rs.10000, the investors gets annually, as
a. 80.00, interest, b. 800.130, discount, c. 80.00, coupon d. 800.00, coupon
4.A bond the value of which is changed into a share is called:
a.convertible bond, b.zero coupon bond, c.negative bond, d.floating rate bond
5.A bond where the interest rate can be reset is: a. convertible bond, b.zero coupon bond c. negative bond,
d.floating rate bond
6. Abond is issued at a price below its face value while on payment, the face value is paid:
a. convertible bond, b.zero coupon bond, c. negative bond d. floating rate bond
7.In which of the following bonds, no interest payment Is made:
a.convertible bond b. zero coupon bond, c. negative bond d. floating rate bond
8.The income that a bond earns from year to year Is called: a. coupon, b.yield to maturity, c. current yield, d.effective yield
9.The actual yield to an investor, instead of nominal interest, is called: a. coupon, b.yield to maturity, c. current yield, d.effective yield
10.The discount rate that makes the present value of bond's payment equal to its price is called:
a.coupon b. yield to maturity c. current yield d. effective yield
11. A risk that arises on account of change in the current market price of the bond, is known as:
a. interest risk b.yield risk c. return risk d. price risk
12.The return to an investor in case of zero coupon bond is different between the price and value:
a: sale, face
b: face, purchase
c: purchase, face
d: face, sale
13 The face value ofbond changes with current interest rates:
a: convertible bond
b: zero coupon bond
c: negative bond
d: floating rate bond
14 Coupon / (1+r), where ris compounded return =
a: future value
b: discount rate
c: present value
d: maturity value
15 To calculate present value under annuity formula, we use the following:
a: PV of investment + PV of face value
b: PV of coupon + PV of face value
c: PV of coupon + PV of investment
d: PV of interest + PV of investment
16 For a 3 year 6% bond of Rs.1000, the present value is if the compounding is annual:
a: Rs.1010.77
b: Rs.1010.91
c: Rs.1100.77
d: Rs.1017.11
17 For a 3 year 6% bond of Rs.1000, the present value is , if the compounding is semi-annual (half yearly):
a: Rs.1010.77 , b. 1010.91 , c.Rs.1100.77 , d. Rs.1017.11

18 Where the current market interest are lower that the fixed coupon rate of a bond:
a: bond is sold at a discount to face value
b: bond earns premium on face value
c: bond sells at par d. there is no effect
19 Where the current market interest rate is higher than the fixed coupon rate of a bond:
a: bond is sold at a discount to face value
b: bond earns premium on face value
c: bond sells at par
d: there is no effect
20 Where the current market rate of interest is equal to coupon rate of the bond:
a: bond is sold at a discount to face value
b: bond earns premium on face value
c: bond is traded at par d. there is no effect
Answers
01 b 02 c 03 d
04 a 05 d 06 b
07 b 08 c 09 d
10 b 11 d 12 c
13 c 14 c 15 b
16 a 17 b 18 b
19 a 20 c
Objective Type Questions on linear programming
1 The word 'linear' represents which of the following:
a: drawing lines for solving management problem b: representation of relationships by straight line.
c: solution for production problem through statistical methods d: representing the solution on straight lines.
2 Linear programming is a _______technique:
a: economics b: mathematical c: algebraic d: any
of the above
3 Linear expression in linear programming is known as:
a: linear function b: algebraic function c: objective function d: main function
4 Linear inequalities in linear programming are known as:
a: linear constraints b: linear functions c: linear relationships d: none of the above
5 The value of decision variables can be:
a: negative or positive b: zero or negative c: positive or zero d: a and b
6 The decision variable in LP that should not assume negative values are called because they represent impossible situation.
a: negative restrictions b: positive restrictions c: Non-negative restrictions d: non-negative and positive restrictions
7 The relationships to be expressed either as equations or inequalities should be:
a: positive b: straight c: cervical d: linear
8 The non-zero variables in a basic feasible solution are called:
a: surplus variables b: slack variables c: artificial variables d: basic variables
9 Positive variables that are added to the left hand side to the constraints to convert them to equalities are called:
a: surplus variables b: slack variables c: artificial variables d: basic
variables
10 Positive variables that are subtracted to the left hand side to the constraints to convert them to equalities are called:
a: surplus variables b: slack variables c: artificial variables d: basic variables
11 The original linear programming problem is called:
a: original problem b: primary problem c: dual problem d: primal problem
12 The problem that is related to original linear programming problem is called:
a: original problem b: primary problem c: dual problem d: primal problem
13 A linear programming problem shows degeneracy:
a: when a basic variable acquires a zero value
b: in the final solution either the no. of basic variables is not equal to the no. of constraints
c: the no. of fern variable does not mita! the nn. of derision variahle.s
d: any of the above
14 For formulation of a linear programming problem, which of the following is an important steps:
a: determination of unknown variables
b: identification of constraints and expressing them in linear equations
c: identification of objectives and represent them as a linear function of decision variables
d: all the above
15 Which of the following combinations are the methods employed in linear programming problems:
a: geometrical, graphical methods b: simplex method, graphical methods
c: geometrical, simplex method d: b and c both
16 Geometrical method can be used effectively when the no. of variable is :
a: minimum 2 b: maximum 2 c: maximum 5 d:
no restrictions on minimum and maximum
17 Which of the following is most effective methods under LPP:
a: graphical b: geometrical c: simplex d: all the above
18 An arithmetical step by step procedure is called:
a: linear programming b: algorithm c: iterative procedure d: none of the above


19 Simplex method is basically and essentially procedure that evaluates corner points in search of the optimal solution:
a: iterative b: continuous c: regular d: minimum
20 In Simplex method, the value of objection function is increased at each step of iteration till:
a: further possibility of increase has ended b: maximum benefit has been obtained
c: no further improvement is possible d: none of the above
21 When Simplex method is used for problems such as maximization of production, profit or contribution, such problem is called:
a: Simplex problem b: minimization problem c: maximization problem
d : a o r c
22 When Simplex method is used for problems such as minimisation of cost or time, such problem is called:
a: Simplex problem b: minimization problem c: maximization problem
d: a or c
23 In which of the following areas, the application of LP techniques can be done:
a: portfolio selection b: staffing problem c: profit planning d:all the above
24 In which of the following areas, the application of LP techniques can not be done:
a: trimming of loss b: agriculture and contract awarding c: financial mix strategy, d. none of the above
Answer
01 b 02 b 03 c 04 a 05 c 06 c 07
d 08 a 09 b 10 a
11 d 12 c 13 d 14 d 15 d 16 d 17
c 18 b 19 a 20 c
21 c 22 b 23 d 24 d

CAIIB ABM JUNE 2018 EXAM 55 QUESTIONS RECOLLECTED

CAIIB ABM  JUNE 2018  EXAM 55 QUESTIONS RECOLLECTED

1.Hicks -Hansen synthesis
2.Basic difference between IS and LM curve
3.Increase in money supply Lowe interest rate and raising inflation
4.NDP @factor cost
5.Demand –pull inflation means
6.Erosion as per the role
7.Climate Survey
8.Case study one related to Budget
9.Central limit theorem
10.sampling methods .
11. job erosion
12 curreneaccountdefficit
13 Gross deficit etc.
case
14..standard deviations mean related
15  .Case 3 Xyz jewellery shop
Related
But the level oh complexity is very high..n ..
16  fiscal policy ,monetary policy
17.demand supply curve etc...
18.Correlation and regression numerical
19.NNP @ factor cost
20working capital
21. bank guarantee
22.Performance Appraisal
23. Halo effect Tendency..
24.NNP at market price
25.In correct characteristics in Business cycle
26 Notional income also known as..
27.Least squre method used in..
28.Fctoring of services the factor
29.Lender to sensitising test and scenerion analysis..Type of loans
30. Debt to equity of enter prises raatio is.05 its...
31.Bank Gaurantee to commoidity brokarage (margin %)..
32.find P(x bar >/85)  ?
33Std error of the mean is????
34 Estimate of the population proportion is..
35 Commericial paper issued multiples of..
36.Commericial paper issued maximum period
37.Find P(88|
39.HRM
40.monetary policy
41.Annuity due prblems
42. Future Value problem
43.Estimation
44.Bond price
45.Revenue dediciat problem
46.Job evealution Job specfication case study
47. Turn over methodeapplied on leass than 5 cr
48. Factor of Supply schedule
49.Lional econmic statement.
50. GDP calculation
51. GNP at amrket price calculation
52. Sampling Methodes
53.Hallo effect
54 Cov(X,Y)=150 mean X=20 mean Y=10 standard deviation x=25 then equation of regression line is
55. 3 questions from HRM 5 marks each



Thank you all,

Srinivas Kante  https://iibfadda.blogspot.com/2018/06/caiib-abm-recollected-june-2018-today.html

New Methods of Computing GDP

New Methods of Computing GDP


Central Statistical Organisation, introduced changes in computation of Gross Domestic Product in 2015.
Accordingly the GDP share as per 2011-12 series for Agriculture is 19%, for Industry 32% and for Services = 49%.
According to changed criteria, the headline growth is to be measured by GDP at constant market prices (to be
referred as GDP), which is an international practice. Earlier it was measured in terms of GDP at factor cost.
Sector-wise estimates of Gross Value Added (GVA) shall beat basic prices instead of factor cost.
GVA is an economic measurement used to calculate the productivity of an economy. The value added formula is
the difference between total economic output and intermediate consumption goods. The relationship between GVA
at factor cost, GVA at basic prices and GDP (at market prices) is given below:
GVA at basic prices = CE + OS / MI + CFC + production taxes less production subsidies.
GVA at factor cost = GVA at basic prices — production tax less production subsidies
Gross Domestic Product (GDP) = Summation GVA at basic prices — product tax — product subsidies
(CE = Employee compensation, OS = Operating surplus, MI = Mixed income, CFC = Consumption of fixed capital).
FORMULAE -
Ministry of Statistics & Program Implementation revised the base year from 2004-05 to 2011-12 for national
accounts and introduced the following formulae:
1.Gross value added (GVA) at basic prices = CE + OS/MI + CFC + Production taxes less Production subsidies
2.GVA at factor cost (earlier referred to as GDP at factor cost) = GVA at basic prices plus Production taxes less Production subsidies
3.GDP = GVA at basic prices + Product taxes - product subsidies
4.NDP/NNI = GDP/GNI - CFC
5.GNI = GDP + Net primary income from ROW
6. Primary Incomes = CE + Property and Entrepreneurial Income
7.NNDI =NNI + other current transfers from ROW, net (Receipts less payments)
8.GNDI = NNDI + CFC = GNI + other current transfers from ROW, net (Receipts less payments)
9.Gross Capital Formation= Gross Savings+ Net Capital Inflow from ROW
10.GCF = GFCF + CIS + Valuables + Errors and Omissions
11.Gross Disposable Income of Govt. = GFCE + Gross Saving of GG
12. Gross Disposable Income of Households = GNDI GDI of Govt. Gross Savings of All Corporations

MODERN THEORY: HICKS — HANSEN SYNTHESIS: IS-LM CURVE MODEL

MODERN THEORY: HICKS — HANSEN SYNTHESIS: IS-LM CURVE MODEL
1. Modern theory was propounded by Hicks and Hensen.
2. According to the theory, the interest depends upon saving, investment, liquidity preference and income.
3. The rate of interest according to the theory is determined by monetary equilibrium and income
equilibrium.
4. This theory is a synthesis between the Classical and Keynes' theories of interest.
5. It has propounded an adequate and determinate theory of interest through the intersection of what are
called IS and LM curves.
6. According to Hicks and Hansen, the classical and loanable funds theories amount to the same thing. The
difference between these two theories, i.e. classical and loanable funds, lies only in the meaning of savings.
7. IS curve is derived from various saving curves at various income levels together with the given
investment demand curve. This IS curve tells us what will be the various rates of interest at different levels of
income, given the investment demand curve and a family of saving curves at different levels of income.
8. LM curve is obtained from Keynes' formulation. The LM curve is obtained from a family of liquidity
preference curves corresponding to various income levels together with the given stock of money supply.
This is because as the level of income increases, people would like to hold more money under the
transactions motive. That is, the higher the level of income, the higher would be the liquidity preference
curve. With the given supply of money, the different levels of liquidity preference curves corresponding to
various levels of income would determine different rates of interest. This yields LM curve, which depicts the
various combinations of interest and income level, at which money market is in equilibrium.
9. Hicks and Hansen show that with the intersection of IS and LM curves, both the interest and income
are simultaneously determined. Thus the classical and Keynes' theories taken together help us in obtaining
as adequate and determinate theory of interest.
DERIVATION OF THE IS CURVE:
1 As the income rises, the savings curve shifts to the right and the rate of interest, which equalizes savings
and investment, falls.
2. Since, as income increases, rate of interest falls, the IS curve slopes downward.
3. IS curve relates the rates of interest with the levels of income at which intended savings and investment
are equal. In other words, the IS curve depicts the various combinations of levels of interest and income at
which, intended savings equal investment; goods-market is in equilibrium.
4. Since with the increase in income the savings curve shifts to the right, its intersection with the
investment demand curve will lower the rate of interest.
5. The level of income and rate of interest are inversely related. That is, the IS curve slopes downward.
6. Further, the steepness of the IS curve depends upon the elasticity or sensitiveness of investment
demand to the changes in rate of interest. A given change in interest will produce a large change in
investment and thereby cause a large change in the level of income.
7. Thus when investment demand is greatly elastic or highly sensitive to the rate of interest, the IS curve
will be flat (i.e. less steep). On the other hand, when investment demand is not very sensitive to the changes
in rate of interest, the IS curve will be relatively steep.
8. The *position of IS curve and changes in its level are determined by the level of autonomous
expenditure
such as government expenditure, transfer payments, autonomous investment. If the government
expenditure or any other type of autonomous expenditure increases, it will increase the equilibrium level of
income at the given rate of interest. This will cause the IS curve to shift to the right. A reduction in
government expenditure or transfer payments will shift the IS curve to the left.
DERIVATION OF THE LM CURVE FROM KEYNES' LIQUIDITY PREFERENCE THEORY
1. The LM curve can be derived from the Keynesian liquidity preference theory of interest.
2. Liquidity preference or demand for money to hold depends upon transaction motive and speculative
motive.
3. It is the money held for transactions motive which is a function of income. The greater the level of

income, the greater the amount of money held for transactions motive and, therefore, the higher the level of
liquidity preference curve.
4. A family of liquidity preference curves can be drawn at various levels of income. The intersection of
these various liquidity preference curves, corresponding to different income levels with the supply curve of
money fixed by the monetary authority, would give the LM curve that relates the rate of interest with the level
of income as determined by money-market equilibrium corresponding to different levels of liquidity
preference curve.
5. The LM curve tells us what the various rates of interest will be (given the quantity of money and the
family of liquidity preference curves) at different levels of income. But the liquidity preference curves alone
cannot tell us what exactly the rate of interest will be.
6. As income increases, liquidity preference curve shifts outward and therefore the rate of interest, which
equates supply of money with demand for money, rises.
THE SLOPE AND POSITION OF THE LM CURVE
1. The LM curve slopes upward to the right. This is because with higher levels of income, demand for
money (that is, the liquidity preference curve) is higher and consequently the money-market equilibrium, that
is, the equality of the given money supply with liquidity preference curve occurs at a higher rate of interest.
This implies that rate of interest varies directly with income
2. Factors that determine the slope of the LM curve include (i) Responsiveness of demand for money (i.e.
Liquidity Preference) to the changes in income and (ii) Elasticity or responsiveness of demand for money
(i.e., liquidity preference for speculative motive) to the changes in rate of interest.
3. As the income increases, demand for money would increase for being for transactions motive. This
extra demand for money would disturb the money-market equilibrium, and in order to restore the equilibrium
the rate of interest will rise to the level where the given money supply curve intersects the new liquidity
preference curve corresponding to the higher income level.
4. In the new equilibrium position, with the given stock of money supply, money held under the
transactions motive will increase whereas the money held for speculative motive will decline. The greater the
extent to which demand for money for transaction motive increases with the increase in income, the greater
the decline in the supply of money available for speculative motive.
5. Given the liquidity preference schedule for speculative motive, the higher the rise in the rate of interest,
the steeper the LM curve consequently.
6. According to Keynes' liquidity preference theory, r = f (M2,L2) where M2 is the stock of money available
for speculative motive and L2 is the money demand or liquidity preference function for speculative motive.
7. The second factor which determines the slope of the LM curve is the elasticity or responsiveness of
demand for money (i.e., liquidity preference for speculative motive) to the changes in rate of interest. The
lower the elasticity of liquidity preference with respect to the changes in interest rate, the steeper will be LM
curve.
8. On the other hand, if the elasticity of liquidity preference (money-demand function) to the changes in
the rate of interest is high, the LM curve will be relatively flat or less steep.
What brings about shifts in the LM curve?:
1. An LM curve is drawn with a given stock of money supply. Therefore, when the money supply
increases, given the liquidity preference function, it will lower the rate of interest at the given level of income.
This will cause the LM curve to shift down and to the right. On the other hand, if money supply is reduced,
given the liquidity preference (money; demand) function, it will raise the rate of interest at the given level of
income and therefore cause the LM curve to shift above and to the left.
2. The other factor that causes a shift in the LM curve is the change in liquidity preference (money
demand function) for a given level of income. If the liquidity preference function for a given level of income
shifts upward, this, given the stock of money, will lead to the rise in the rate of interest. This will bring about
a shift in the LM curve above and to the left. On the contrary, if the liquidity preference function for a given
level of income declines, it will lower the rate of interest and will shift the LM curve down and to the right.
Intersection of the IS and LM curves: Simultaneous determination of interest rate and income
1. The IS curve and the LM curve relate the two variables: (a) income, and (b) the rate of interest.
2. Income and the rate of Interest determined together at the equilibrium rate of interest are, at the point
of intersection of IS and LM curve.
3. At this point, income and the rate interest stand in relation to each other such that (1) investment and
saving are in equilibrium, and (2) the demand for money is in equilibrium with the supply of money (Le., the
desired amount of money is equal to the actual supply of money).
4. Thus, a determinate theory of interest is based on: (1) the investment-demand function, (2) the saving
function (or, conversely, the consumption function), (3) the liquidity preference function, and (4) the quantity
of moneyor, conversely, the consumption function),
5. According to Hicks and Hansen, both monetary and real factors, namely, productivity, thrift, and the
monetary factors, that is, the demand for money (liquidity preference) and supply of money play a part in
determining of the rate of interest. Any change in these factors will cause shift in IS or LM curve and will
therefore change the equilibrium level of the rate of interest and income.