Q3
(a) IS curve is the locus of equilibrium points in the commodity market. What do the points above and below the IS curve signify ? (15 marks) (b) Compare the deposit multiplier with the money multiplier. Is there any impact on the money multiplier arising out of massive use of credit and debit cards ? Justify your answer. (15 marks) (c) Discuss the effectiveness of the monetary policy in an open economy with flexible exchange rate and perfect capital mobility. Will this policy remain effective with fixed exchange rate also, while other things remain the same ? Explain. (20 marks)
हिंदी में प्रश्न पढ़ें
(a) IS वक्र वस्तु बाजार के संतुलन बिन्दुओं का बिन्दुपथ है । IS वक्र के ऊपर तथा नीचे के बिन्दु क्या दर्शाते हैं ? (15 अंक) (b) जमा गुणक की तुलना मुद्रा गुणक से कीजिए । क्रेडिट और डेबिट कार्ड के प्रचुर उपयोग का मुद्रा गुणक पर क्या कोई प्रभाव पड़ता है ? अपने उत्तर के औचित्य को स्थापित कीजिए । (15 अंक) (c) पूर्ण पूंजी गतिशीलता एवं नम्य विनिमय दर सहित खुली अर्थव्यवस्था में मौद्रिक नीति की प्रभावशीलता की विवेचना कीजिए । यदि अन्य स्थितियाँ अपरिवर्तित रहें तो क्या स्थिर विनिमय दर में भी यह नीति प्रभावशाली रहेगी ? व्याख्या कीजिए । (20 अंक)
Directive word: Discuss
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How this answer will be evaluated
Approach
Discuss requires analytical exposition with critical evaluation. Structure: brief intro on monetary macroeconomics → Part (a): IS curve disequilibrium with diagram (~300 words, 15 marks) → Part (b): comparative analysis of multipliers with card impact (~300 words, 15 marks) → Part (c): Mundell-Fleming model for both exchange rate regimes with policy ineffectiveness under fixed rates (~400 words, 20 marks) → conclusion on monetary policy constraints in globalized economies.
Key points expected
- Part (a): Points above IS curve signify excess supply of goods (S>I, unintended inventory accumulation); points below signify excess demand (I>S, inventory depletion); adjustment mechanism through interest rate and output changes
- Part (b): Deposit multiplier (1/rr) vs money multiplier [(1+c)/(rr+c+er)]; credit/debit cards reduce currency-deposit ratio (c), thereby increasing money multiplier; distinction between narrow and broad money impact
- Part (c): Under flexible rates with perfect capital mobility (BP horizontal), monetary policy fully effective via exchange rate channel; LM shifts cause currency depreciation and net export boost
- Part (c) continued: Under fixed exchange rates with perfect capital mobility, monetary policy completely ineffective; LM shifts trigger offsetting capital flows and reserve changes, returning LM to original position
- Mundell-Fleming model diagrams for both regimes showing IS-LM-BP equilibrium and adjustment dynamics
- Reference to India's managed float experience post-1991 and RBI's sterilization operations under capital mobility
Evaluation rubric
| Dimension | Weight | Max marks | Excellent | Average | Poor |
|---|---|---|---|---|---|
| Concept correctness | 25% | 12.5 | Precise distinction between commodity market disequilibrium positions in (a); accurate formulas and behavioral distinctions between deposit and money multipliers in (b); flawless application of Mundell-Fleming conditions—perfect capital mobility renders BP horizontal, monetary policy effective under flexible rates but fully ineffective under fixed rates due to automatic monetary adjustment | Correct basic definitions but conflates deposit and money multiplier formulas; vague on why monetary policy fails under fixed rates; minor errors in disequilibrium zone identification | Reverses disequilibrium zones (S>I below IS); treats deposit and money multipliers as identical; claims monetary policy effective under both exchange rate regimes or confuses capital mobility conditions |
| Diagram / model | 20% | 10 | Clean IS curve diagram with labeled disequilibrium zones and directional arrows for (a); standard money multiplier flow chart for (b); twin Mundell-Fleming diagrams for (c) showing LM shifts, BP line, and adjustment paths—flexible rate with exchange rate change, fixed rate with LM snapping back | Draws IS curve but omits zone labels or arrows; presents only one Mundell-Fleming diagram or mislabels axes; diagrams present but not integrated with explanation | No diagrams or incorrect slopes (upward sloping IS, vertical BP); diagrams copied without explanation or relevance to question parts |
| Quantitative reasoning | 20% | 10 | Explicit derivation: money multiplier m = (1+c)/(rr+c+er) showing how c↓ from card usage raises m; numerical illustration of how reserve changes transmit through banking system; quantitative demonstration of why LM shift magnitude equals reserve change under fixed rates | States formulas without derivation; mentions c falls but no quantitative linkage to multiplier magnitude; no numerical illustration of sterilization arithmetic | No formulas or incorrect algebra; purely verbal treatment of multiplier mechanics; confuses percentage changes with level effects |
| Indian / empirical examples | 15% | 7.5 | Cites RBI's M1, M3 multiplier trends showing declining currency ratio with digitalization (UPI growth post-2016); references 2013 taper tantrum or 2020 COVID period to illustrate monetary policy constraints under managed float with capital mobility; mentions forex reserve accumulation as sterilization evidence | Generic mention of 'digital India' without RBI data; vague reference to '1991 reforms' without specific monetary policy episode; no empirical backing for multiplier trends | No Indian examples; uses developed country cases exclusively or irrelevant historical references; factual errors about India's exchange rate regime |
| Policy implication | 20% | 10 | Synthesizes trilemma implications: India sacrifices monetary autonomy under fixed rates; recommends flexible rate regime for emerging markets seeking independent monetary policy; discusses implications for RBI's inflation targeting framework under capital mobility; addresses digital payment policy to optimize multiplier efficiency | States that monetary policy is 'less effective' under fixed rates without trilemma framing; generic conclusion on 'need for coordination' without specific institutional implications | No policy synthesis; contradictory recommendations (advocates fixed rates and independent monetary policy); ignores trilemma constraint entirely |
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