BECC 133 Solved Guess Paper 2026 | Principles of Macroeconomics-I | IGNOU Bachelor of Arts (General) BAG

Sample 1: Explain the circular flow of income in a four-sector economy with the help of a diagram. Describe the relationship between leakages and injections.

Meaning: Circular flow of income is the flow of money income, or of goods and services, across the sectors of an economy. It is called circular because it returns to its starting point: whenever output is produced, an equal amount of income is generated.

Two flows run side by side.

1. Real flow: goods and services and factor services moving between sectors.
2. Money flow: factor payments and consumption spending moving in the opposite direction.

The four sectors. Households supply factor services and receive rent, wages, interest and profit. Firms produce and sell goods. The government collects taxes and spends. The rest of the world buys our exports and sells us imports.

1. Leakages (withdrawals): saving, taxes and imports take money out of the flow.
2. Injections (additions): investment, government spending, subsidies and exports add money back.

Exports bring money in, while imports send it out. When exports exceed imports there is a trade surplus; when imports are higher there is a trade deficit.

Diagram tip: draw households and firms facing each other, the financial market between them (saving to investment), government above (taxes and spending) and the rest of the world below (imports and exports).

Conclusion: the flow stays balanced when total leakages equal total injections. If injections are larger the flow expands, and if leakages dominate it contracts.

Sample 2: Derive the demand for labour and the supply of labour curves. Explain how demand and supply in the labour market determine the level of employment and the real wage rate.

Meaning: a production function shows the technical link between inputs and output, Y = F(L, K), with capital fixed in the short run. In the classical system, output and employment are settled in the labour market, where wages are flexible and competition is perfect.

A. Demand for labour

1. Derived demand: labour is hired because it helps produce goods and services.
2. Profit rule: a firm hires until the marginal product of labour equals the real wage, W/P = MPL.
3. Downward slope: diminishing returns make Ld a negative function of W/P.
4. Aggregation: adding all firms gives the economy-wide demand curve.

B. Supply of labour

1. Income-leisure trade-off: work brings disutility, so workers compare income with leisure.
2. Upward slope: a higher real wage draws out more hours through the substitution effect.
3. Backward bend: at very high wages the income effect wins and the curve bends back.

C. Equilibrium. Where Ld = Ls we get equilibrium employment L0 and the real wage (W/P)0. Putting L0 into the production function fixes output Y0. If money wages and prices rise in the same proportion, the real wage and employment do not change.

Conclusion: labour market equilibrium, together with the production function, decides employment, the real wage and output, which in the classical system stays at full employment.

Sample 3: Explain the concept of the investment multiplier with the help of a diagram. What are its limitations? What will be the value of the multiplier if MPC = 0.8?

Meaning: the multiplier is the change in equilibrium output when autonomous spending rises by one unit. The investment multiplier is 1 / (1 - c), where c is the marginal propensity to consume.

A rise in investment raises income, the higher income raises consumption, and that spending raises income again. Income finally grows by a multiple of the first change.

Numerical: with MPC = 0.8, multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5. So an extra investment of 100 crore raises income by 500 crore.

Diagram tip: draw the 45-degree line AD = Y, the original AD line cutting it at E (Y0), and a parallel higher AD line cutting it at E1 (Y1). The gap Y0 to Y1 is larger than the upward shift.

Limitations of the multiplier

1. Full employment ceiling: output grows only while idle resources exist.
2. Idle cash: income held back rather than spent weakens the chain.
3. Shortage of consumer goods: it lowers the MPC and the multiplier.
4. Time lags: delays between earning and spending cut the effect.
5. Rising prices: inflation reduces real consumption.

Conclusion: the multiplier magnifies investment into a larger rise in income, equal to 5 at MPC 0.8, but its real size is limited by full employment, hoarding, shortages, lags and prices.

Sample 4: Define the net export function. Explain how equilibrium output is determined in an open economy.

Meaning: net exports equal exports minus imports, NX = X - M. NX is positive when exports are larger and negative when imports are larger.

The net export function

1. Exports are exogenous: they depend on the income of trading partners, not on domestic output.
2. Imports rise with output: M = mY, where m is the marginal propensity to import.
3. Inverse link with output: because imports grow with income, NX falls as Y rises.
4. Exchange rate effect: depreciation of the rupee raises exports, cuts imports and lifts NX.

Equilibrium output. Adding the external sector widens the market, so aggregate demand becomes AD = C + I + G + (X - M). Since NX slopes downward, the new AD line is flatter and does not shift up in a parallel way. When a closed economy opens up, equilibrium moves from Y1 to a higher Y2 where the new AD line meets the 45-degree line.

Diagram tip: show C + I + G as a solid line and C + I + G + NX as a dashed, slightly flatter line above it, with Y1 and Y2 marked on the income axis.

Conclusion: net exports fall as output rises, yet adding the external sector lifts aggregate demand and pushes equilibrium output above its closed-economy level.

Sample 5: Discuss the Keynesian theory of demand for money. What are the motives for holding money?

Meaning: for Keynes, demand for money is liquidity preference, the public's desire to hold cash and other ready money instead of interest-earning assets.

Three motives for holding money

1. Transaction motive: money bridges the gap between receiving income and making payments. It rises directly with income.
2. Precautionary motive: money is kept aside for sudden expenses such as illness or job loss.
3. Speculative motive: money is held to avoid capital losses on bonds. It moves inversely with the rate of interest.

Liquidity preference curve. Because of the speculative motive, the LP curve slopes downward: people hold little money at high interest rates and more at low rates. At a very low rate the curve turns flat. This is the liquidity trap, where any extra money is simply held and monetary policy stops working.

Diagram tip: put the rate of interest on the vertical axis and speculative demand for money on the horizontal axis, and mark the flat stretch as r min.

Conclusion: Keynes explains money demand through transaction, precautionary and speculative motives, giving a downward-sloping LP curve that becomes horizontal in the liquidity trap.