Macroeconomics Answers

8. Define consumption and saving along with their schedules. Also discuss the determinants of consumption and saving.

9. Explain the relationship between investment and interest rate.

Explain the theory, arithmetic and rationale behind the multiplier model.

What is the government spending multiplier? Give an example

Discuss the process of deposit creation in banks. Explain the effect of Reserve ratio on deposit creation.

Suppose that you are the member of the Board of Governors of the State Bank. The economy is experiencing the severe unemployment. What changes in

A. The Reserve Ratio
B. The Discount Rate
C. Open Market Operations

would you recommend? Explain in each case how the change you advocate would affect the money supply, interest rate and aggregate demand.

What is Balance of Payments? Discusses causes of adverse Balance of Payments in Pakistan?

How depreciation in currency will affect Pakistan’s Economy? Explain.

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.
a. A widespread fear of depression on the part of consumers.
b. A $2 increase in the excise tax on a pack of cigarettes.
c. A reduction in interest rates at each price level.
d. A major increase in federal spending for health care.
e. The expectation of rapid inflation.
f. The complete disintegration of OPEC, causing oil prices to fall by one-half.
g. A 10 percent reduction in personal income tax rates.
h. A sizable increase in labour productivity (with no change in nominal wages).
i. A 12 percent increase in nominal wages (with no change in productivity).
j. Depreciation in the international value of the dollar.

2. Using the consumption and saving data in question 1 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and planned investment at the $300 billion level of domestic output? What are the levels of saving and actual investment? Use the concept of unplanned investment to explain adjustments toward equilibrium from both the $380 and $300 billion levels of domestic output.

Following is a list of domestic output and national income figures for a given year. All figures are in billions. Calculate GDP by both the expenditure and income methods. The answers derived by each approach should be the same.


Personal consumption expenditures $120
Capital consumption allowances (depreciation)20
Interest and miscellaneous investment income 10
Net income of farms and unincorporated business 17
Net exports+13
Profits of corporation and government enterprises before taxes 42
Wages, salaries, and supplementary labour income 113
Indirect business taxes (less subsidies)11
Government current purchases of goods and services 40
Net investment (net capital formation) 30
Taxes less subsidies on factors of production 10