Macroeconomics Answers

Explore 05 yearly data of the following indicators with respect to Pakistan in graphical as well as tabular form, summarize the 05-year economic performance of Pakistan with the help of your data also elaborate the reasons for ups and downs in these factors.

a) Gross Domestic Product (GDP)      

b) Gross National Product (GNP) 

A small open economy has a nominal annual GDP of 17 billion pesos, and has been growing at a rate of 2% a year. It has 14 billion pesos of outstanding claims held against it by the rest of the world, which it services at an effective peso nominal interest rate of roughly 2% per annum. It holds claims worth the equivalent of 7 billion pesos on the rest of the world on which it receives an effective peso nominal interest yield of about 4% a year. Presently, its (nominal) current account balance (already excluding net interest payments) is in deficit to the tune of about -850 million pesos a year.

1. Suppose a level of debt-to-GDP is considered sustainable if it is not rising over time. Is the present level of the economy’s current account balance one that is consistent with debt sustainability? Present your analysis and any relevant calculations.

You are given the information shown in the table about production relationships in Singapore and the rest of the world.

Inputs per Unit of Cloth Output

Singapore 75

Rest of the world 50

Inputs per Unit of Rice Output

Singapore 100

Rest of the world 50

You make several Ricardian assumptions: These are the only two commodities, there are constant ratios of input to output whatever the level of output of rice and cloth, and competition prevails in all markets.

i) If no international trade is allowed, what price ratio would prevail between rice and cloth within Singapore.

ii) If free international trade is opened up, what goods will Singapore export? Import?

1.  What are the two components of the user cost of capital? Explain why each is a cost of using a capital good.
2. . Explain why the saving curve slopes upward and the investment curve slopes downward in the saving– investment diagram. Give two examples of changes that would shift the saving curve to the right, and two examples of changes that would shift the investment curve to the right
3. “A permanent increase in government purchases has a larger effect than a temporary increase of the same amount.” Use the saving–investment diagram to evaluate this statement, focusing on effects on consumption, investment, and the real interest rate for a fixed level of output. (Hint: The permanent increase in government purchases implies larger increases in current and future taxes.

One recent magazine article on economic recovery from a recession argued: “Labor productivity growth usually accelerates in the first year of an expansion, because firms are slow to hire new labor.” 

Okahao island is a hypotheticalsmall, closedeconomy in the northern part of Namibia. Autonomous consumption in Okahao dollars is N$400.00, government spending is N$200.00 and Tax = 0.1Y. The investment function is I = 300 – 10r and the money demand function is [m/p]d = Y - 50r. Money supply is N$2500.00 and price level is N$5.00.

1. Derive the equations for the IS curve and the LM curve. (8 marks)

2.Find the equilibrium interest rate. (5 marks)

3. Compute the equilibrium level of income. (5 marks)

4. Use the IS-LM model to graphically depict the equilibrium interest rate and level of income calculated in (2) and (3) above. Show both intercepts. (5 marks)

5. Suppose that the government decides to double both the taxes and government spending. Calculate the new rate of interest and the level of investment. (5 marks)

6. Does your answer in (5) above depend on the marginal propensity to consume? (2 marks

Since money is the most liquid of all assets, the demand for it is also called liquidity preference.

A-TRUE

B-FALSE