IAS Mains Economics Paper 2013

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Section –A

Q.1 Answer the following in about 150 words each:

  1. Consider a perfectly competitive exchange economy with no production, and two different goods 1 and 2. Let and be the prices of the goods. The economy is populated by two people A and B. A’s initial endowment of the two goods is given by , and B’s initial endowment is ( , ). A can choose any bundle ( ) and B can choose any bundle ( ). In this pure exchange economy write out the conditions for a Walrasian equilibrium. Show that for such an economy for any equilibrium set of prices that the absolute price level is indeterminate.

  2. Kaldor in his theory of distribution argues, unlike Kalecki, that it is not reasonable to neglect the constraint of labour shortage, and analyse a situation of full employement. Show how investment and saving propensities determine distributive shares in the Kaldor approach. Suppose that investment is not exogenous as in Kaldor’s origina l model but that it varies with profits. What does this mean for the stability of the Kaldor model of distribution ?

  3. Explain the determination of output and employment in a macroeconomy under the conditions when individuals are subject to (i) no money illusion, (ii) money illusion.

  4. An individual finds that all his receipts and payment transactions are in the form of money that bears no interest. However, he can convert money into bonds and earn interest income but that involves a fixed cost of each conversion transaction. What are the determinants of the individual’s demand for holding money ?

  5. Suppose an industry is characterized by the following three conditions: (i) there are a large number of small firms, each producing a differentiated product and facing a downward sloping demand curve; (ii) each firm ignores the effects of its actions of its actions on the decisions taken by other firms; and (iii) new firms producing close substitutes for the product of the existing firms can enter the industry. Then, derive the equilibrium conditions of an individual firm and of the industry.


  1. Under Bertrand price competition with homogeneous products in an oligopoly demonstrate how is the equilibrium price that will prevail arrived at ?

  2. Let the market demand curve for carbonated water be given by where P is the price and Q is the market output. Let there be two firms producing carbonated water, each with a constant marginal cost of INR 2, or, .

    What is the market equilibrium price and quantity when each firm behaves as a Cournot duopolist ? What are the firms’ profits ?

    What is the market equilibrium price and quantity when each firm behaves as a Bertrand duopolist ? What are the firms’ profits ?


  1. If worker supply labour on the basis of an expected real wage, how is the aggregate supply of output determined in the economy ? Suppose aggregate demand and supply are below the natural rate of employment and output. Would the New Classical economists advocate any particular policy intervention when the economy is in such a situation ?

  2. What are the main goals of a central bank ? What are the instruments by which the central bank manages the liquidity in the financial system and how does it use these instruments to achieve its goals ?


  1. Macroeconomics is usually approached via the outcomes of economic interaction in the following four markes – commodities, money, bonds, and labour markets. The Classical economists focused on which three of these four markets ? In which market does the loanable fund theory of interest rate determination of the Classical economists focus and how is the interest rate determined ? The Neo Classical synthesis focuses on which three markets ? In which market is the interest rate primarily determined in the liquidity preference theory?

  2. After 2003 till 2008 many emerging economies including India received huge capital inflows. To contain the effect of these flows the central bank sterilized the inflows. What is sterilization and how does it affect the supply of money in the economy ?

Section –B

Q.5 Answer the following in about 150 words each:

  1. What are the three basic goals of public finance ? Can these goals be coordinated into an overall pattern of policy or are they always in conflict ?


  2. What is an offer curve in international trade ? For two countries engaged in trade in two goods, draw the offer curves such that the offer curve of the home country has a section reflecting inelastic import demand and the foreign country’s offer curve is elastic throughout. Indicate in your diagram which part of the home country’s offer curve is inelastic. What is the reason for this shape of the offer curve ? Suppose the home country imposes a tariff on imports. Demonstrate the implications for trade.

  3. Summarize the main arguments of the trade optimists and trade pessimists with regard to trade policy for developing countries. Which argument does the data tend to support ?

  4. State five reasons that support government intervention in agricultural markets.

  5. Expand on the following three explanations for the Kuznets hypothesis about inequality and

    development –(i) the cohort size hypothesis, (ii) the effect of openness on inequality, and (iii) the strong versus the weak version of the hypothesis.


  1. Suppose a given yield of tax is to be obtained from an excise on a particular product in perfectly competitive industry. If the objective is economic efficiency the government would prefer that tax which obtains the desired yield with a lesser increase in the price. Should the government impose a unit tax or an ad valorem tax if the objective is that they should the government impose a unit tax or an ad valorem tax if the objective is that they should both impose the same burden at the initial price before the imposition of the tax ? Demonstrate your answer with a diagram.

  2. What is rent seeking ? Consider a proposal by a government to levy a proportional tax on income so as to subsidize the consumption of a good. The proportional tax at a rate t reduces the wage received to w(1-t) which with a standard upward sloping supply of labour curve will reduce the hours of labour worked from say to . The net income of the person falls and tex revenue will be . This is transferred as a subsidy which reduces the price of the subsidized good from P to and increases the quantity demanded from to . What is the valuation of the subsidy by the recipient ? Is it equal to the value of taxes paid to finance the subsidy ? If the tax payer decides to devote resource to rent seeking to forestall the policy to subsidize the good and the subsidy recipient is also willing to devote resources to encourage the adoption of the policy, who will have the advantage in the rent seeking context ?


  1. Suppose the goods, financial, current account and foreign exchange market are initially in equilibrium. The economy has low or imperfect capital mobility and operates at a fixed exchange rate. The economy is subject to a favourable demand shock that rises expenditure. What is the outcome of the shock on the aggregate income and interest rate in the short run ? How is the balance of payments equilibrium achieved ? Draw a diargram in support of your answer.

  2. What is a speculative attack on a currency ? Suppose the economy has a fixed exchange rate and the government is following an expansionary macroeconomic policy. The government increases the budget deficit which it finances through a monetary expansion. How does this lead to a crisis ? What is the timing of the speculative attack ?


  1. Explain the lewis model of structural change from a agricultural economy to a modern inductrial economy. State three major criticisms of the Lewis model.

  2. It is said that a characteristics of the Harrod-Domar model is that even for the long run the economy is at best balanced on a knife-edge of equilibrium growth. Explain the Harrod-Domar model and the reason for this characteristic.

  3. What are the two key conclusions of the Heckscher-Ohlin model of international trade ? Under what assumptions are these conclusions arrived at ?

IAS Mains Economics Paper 2013 ~ IAS Mains Economics Paper 2013


Section –A

Q.1 Answer the following in about 150 words each:

  1. Write on ‘Drain Theory’ as developed by Dadabhai Naoraji. How does it explain sustained poverty during the British Rule in India?

  2. Mixed economy is an outcome of the compromise between laissez-faire capitalism and socialist state control of resource. Elaborate. Mention its salient features.

  3. State the basic features of Mahalanobis model.

  4. How is development looked upon by A. K. Sen in terms of freedom and poverty as unfreedoms? Point out his narration of five dimensions of poverty.

  5. What are the components of Land Reforms in India? Has it been completed? If not, then what are the obstacles?


  1. “An underdeveloped money and capital market has been a major cause of slow economic growth in India.” In the light of this statement, give relative importance of financial sector vis-à-vis real sector in Indian economy.

  2. “A close connection between the finance on the hand, and politics and administration on the other land, and the influence of the latter on the former cannot be avoided. This is all the more true in India.” Do you agree with this statement of C. N. Vakil? IS it relevant even today?


  1. The industrial development agenda framed by the Industrial Policy, 1956 transformed the Indian economy substantially from an agricultural to an industrial economy. Elucidate. State in brief sectoral composition of growth during the period before 1990.

  2. How are ‘absolute’ and ‘relative’ poverty measured? What modification in it has been suggested by Amartya Sen? What are the recent advances in the area of poverty measurement? Discuss.


  1. Transformation of rural sectore is key to economic development as it sustains two-thirds of Indian population. How physical connectivity, electronic connectivity and knowledge connectivity may be helpful in this transformation? Explain the linkages.

  2. Inflation is not a purely monetary phenomenon in India and hence the scope of monetary policy of the RBI to contain it is limited. Discuss.

Section –B

Q.5 Answer the following questions in about 150 words each:

  1. Do you agree that focused and target-oriented technological interventions under National Food Security Mission (NFSM) have made significant impact since its inception? Justify.

  2. “Partial capital account convertibility cannot serve the purpose of integrating Indian economy with global economy.” Analyse critically.

  3. What are the key initiatives proposed in Foreign Trade Policy, 2009-2014 for market diversification and technological upgradation to give a boost to exports?

  4. Write on ‘dichotomy of development’ and ‘urban-bias’ in Indian economy.

  5. What is ‘Crony Capitalism’? How it compromises economic and social justice issues? Explain.


  1. What is the present policy of disinvestment of the Government of India? What modification can be introduced in order to make it fruit-bearing?

  2. What are the major objectives of the Direct Taxes Code Bill, 2010? Will it be effective in generating enhanced tax revenues?


  1. “Indian planning structure and system still remains largely in favour of a centralized nature of planning. The 73rd and 74th Constitutional Amendments have hardly brought about any change in reality in the nature of Indian planning process.” Critically evaluate this statement.

  2. Accelerated growth of tertiary sector during the past two decades in Indian economy has posed multiple challenges. Discuss.


  1. “Speculators may do no harm as bubbles on a steady of enterprise, but the position is serious when enterprise becomes the bubble on whirlpool of speculation. When enterprise becomes a by-product of the activities of a casino, the job is likely to be undone.” Explain in the context of global financial crisis and its impact on Indian economy.

  2. Account for the change in the employment pattern in India after liberalization. What are your suggestions for employment security in the ‘informal’ sector of the economy? Discuss.

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