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B.Com. LL.B. (Five Years) Sem 2 Macro Economics 2026 Jan Question Paper with Solutions - KSLU

KSLU Solved Question Papers

Macro Economics

Previous Year Question Paper with Solution

B.Com. LL.B. (Five Years) · Sem 2

2026 Jan Examination

munotes.in

Mumbai

First published on munotes.in on 21 October 2026.

Published by munotes.in, Mumbai.

Model answers written and edited by the munotes.in editorial desk.

Passages from this volume may be quoted, in print, online or by an AI system, with credit: name munotes.in and link to this volume's page. The volume may not be reproduced as a whole. Full terms at munotes.in/content-license.

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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2026 Jan examination.

The Paper as Set

The questions in this volume are the questions asked at the 2026 Jan examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.

Duration 3 hours · Total marks 80 · 20 questions answered

Instructions printed on the paper

N.B. (1) i. Answer all five Units. ii. One essay type question and short note/problems is compulsory from each Unit. iii. Figures to the right indicate marks. iv. Answer should be written either in English or Kannada Completely.

How to use this volume

Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.

Read the original question paper

Q1

Unit I

(a)Explain circular flow of Income and Wealth with the help of a diagram.[10]

Answer

For full marks, cover: what the circular flow means; income as a flow and wealth as a stock; the two-sector flow with its real and money flows; saving, investment and the financial market; the three-sector flow with the government; the four-sector flow with the rest of the world; leakages and injections and the condition for equilibrium; the diagram drawn as a set of labelled arrows; Indian figures; why the idea matters; and a conclusion.

Meaning of the circular flow

The circular flow of income is the movement of goods, services, factor services and money between the main groups of an economy. These groups are households, firms, the government and the rest of the world.

Every rupee one group spends is a rupee another group earns. So income does not disappear when it is spent. It goes round and round. Production creates income, income creates spending, and spending pays for production again.

This is why national product, national income and national expenditure are equal over a year. They are the same flow measured at three different points of the circle.

Income and wealth

Income is a flow. It is measured over a period, such as a year. Wages, rent, interest and profit are income.

Wealth is a stock. It is measured at a point of time. Land, buildings, machines, money and shares are wealth.

The two are linked. Wealth used in production yields income. Income that is saved and invested adds to wealth. A new factory built this year is investment out of this year's income. Next year it is part of the nation's wealth and earns income of its own. The circular flow of income therefore also keeps the stock of wealth growing.

The two-sector economy

Assume only households and firms, no government and no foreign trade. Households own the factors of production. Firms hire them and produce goods.

There are two flows, running in opposite directions.

Real flow. Households supply land, labour, capital and enterprise to firms. Firms supply goods and services to households.
Money flow. Firms pay rent, wages, interest and profit to households. Households spend this income on the goods and services of firms.

These flows pass through two markets. The factor market is where firms buy factor services. The product market is where households buy goods. If households spend all their income, the flow continues at the same level year after year.

Saving, investment and the financial market

Households do not spend all their income. The part they keep is saving. Saving is a leakage, because it leaves the spending stream.

Saving is not lost. It flows into banks and the capital market, which lend it to firms. Firms spend it on new machines and buildings. This is investment, an injection into the flow.

If planned investment equals planned saving, the flow stays steady. If investment is less than saving, spending falls, firms cut output and income shrinks. If investment is more than saving, income rises.

The three-sector economy

Now add the government.

Households and firms pay taxes to the government. Taxes are a leakage.

The government buys goods and services from firms and pays salaries to its staff. This is an injection.
The government makes transfer payments, such as pensions and subsidies, to households.

The flow stays steady when saving plus taxes equals investment plus government spending (S + T = I + G). A deficit budget, where G exceeds T, adds to the flow. A surplus budget takes from it.

The four-sector economy

Finally add the rest of the world.

Imports are spending on foreign goods. The money goes abroad, so imports are a leakage.
Exports bring foreign spending into the home economy. They are an injection.

The whole economy is in equilibrium when total leakages equal total injections:

S + T + M = I + G + X

Here M is imports and X is exports.

The diagram

Draw households in a box on the left and firms in a box on the right. Put the government box at the top, the financial market box in the middle and the rest-of-the-world box at the bottom. Then draw these labelled arrows.

Arrow	From	To	What it carries
1	Households	Firms	factor services (real flow)
2	Firms	Households	rent, wages, interest, profit (money flow)
3	Firms	Households	goods and services (real flow)
4	Households	Firms	consumption spending (money flow)
5	Households	Financial market	saving (leakage)
6	Financial market	Firms	investment (injection)
7	Households and firms	Government	taxes (leakage)

Arrow	From	To	What it carries
8	Government	Firms and households	purchases, salaries, transfers (injection)
9	Households and firms	Rest of the world	imports (leakage)
10	Rest of the world	Firms	exports (injection)

Draw the real flows with a broken line and the money flows with a solid line. The inner loop of arrows 1 to 4 is the two-sector flow. Each outer box adds one leakage and one injection.

The flow in Indian figures

MoSPI's first estimate for 2025-26, released in June 2026, shows how India's GDP was spent. Private final consumption was 56.7 per cent of GDP. Government final consumption was 10.7 per cent. Gross fixed capital formation, or investment, was 31.9 per cent. Exports were 22.2 per cent and imports 24.4 per cent.

So households are the largest spenders. Investment is the second. Imports exceed exports, which means a net leakage to the rest of the world. Nominal GDP for 2025-26 stands at about Rs 345 lakh crore in MoSPI's update of August 2026.

Why the circular flow matters

It shows why the three measures of national income agree. Product, income and expenditure are the same flow.
It explains changes in income. When leakages exceed injections, income falls. When injections exceed leakages, income rises. This is the root of Keynes's theory of income.
It guides policy. In a slump the government can raise injections by spending more, or the central bank can cut interest rates to raise investment.
It shows how sectors depend on each other. A fall in exports hurts firms, then workers' incomes, then consumption.
It shows the role of banks. They turn saving into investment and keep the flow going.

Conclusion. The circular flow shows that one group's spending is another group's income, so production, income and spending form one unbroken circle. Saving, taxes and imports draw money out of it, and investment, government spending and exports put money back. Income is steady only when leakages equal injections, that is, when S + T + M = I + G + X holds. Income is a flow that, through investment, builds wealth, a stock, which earns more income in turn. That is why the idea is the starting point of macroeconomics.

B.Com. LL.B. (Five Years) Sem 2 Macro Economics 2026 Jan Question Paper with Solutions

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