Macroeconomics Answers

a.            An economy produces three goods: organ, apple and organ juice. It is assumed that half of the organ are bought and consumed as final good; the other half is used to produce organ juice.                                                                                                 (2 Marks)

In 2019, 20 KGs of organ are produced at Rs.50/kg, 40 KGs of apple are produced at 100/kg, and 25 Glasses of organ juice are produced at Rs.200/glass.

In 2020, 40 KGs of organ are produced at Rs.80/kg, 60 KGs of apple are produced at 110/kg, and 30 glasses of organ juice are produced at Rs.195/glass.

  Find the following:

i.               Assuming 2019 is the base year; calculate the real and nominal GDP in 2019 and

2020.

b.    Analyze how much Pakistan’s GDP and each of its components is affected by the following transactions? Explain your answers                                                    (3 Marks). 

i.                Atiya spends Rs.1000 to purchase dinner at the finest restaurant in Karachi

ii.              Your mother spend weekend cleaning your house

iii.            Dalda Banspati Limited Pakistan builds Rs.50 million worth of cooking oil, but consumers only buy Rs. 45 million worth of them.

You have been hired by Kia as manager for its Pakistan operations. Assume following is the short-run production function at their assembly plant outside Karachi:

           Q = 10L² – 0.5 L³     where L is variable input labor, Q is output of Cars assembled

a.     Find the ranges of the three stages of production. (2 Marks)

b.     Demonstrate the relationship between Total Production, Marginal Product and AverageProduct in a hypothetical graph and clearly label the three stages as per the values of Lyou observed in (a) above     (2 Marks)

c.      At the end of the year it is expected that output will double with purchase ofnew equipment and machinery. The production function is estimated to be

                       Q = 60L^.30K^.70    where L is labor and K is capital.

Suppose initial L₁ = 1 and K₁ = 1. When inputs are in increased to L₂ = 2 and K₂ = 2,

do you observe increasing, decreasing or constant returns to scale?     (1 Mark)

d.     Assume Kia Head Office is considering hiring more laborers either at their Gwadarplant or alternatively at the Karachi plant. What will be your advice if workers’ marginal product is 40 at wage of Rs=5/hour in Karachi and marginal product is 28 at wage of Rs=4/hour in Gawdar?(1 Mark)

A Solow Growth Model economy has a savings rate of 20 percent, a 5 percent rate of depreciation and a production function Y = K^1/2L^1/2. The economy currently has 100 workers and 100 units of capital. How much capital will the economy have one year from now?

Due to COVID-19 situations the oil prices fall in international market. Let’s assume that output starts at its natural level.

a.     What happens to the Pakistan’s economy (output and price) in the short run? Explain your answer using AS-AD graphs.

 

What happens to Pakistan’s economy (output and price) in the long run? Explain your     answers using graphs

Assume that the marginal private costs of a firm producing fuel-efficient cars is greater than the marginal social costs. Assume that the marginal private benefits of a firm producing fuel-efficient cars is the same as the marginal social benefits. Discuss one way that the government can try to increase production and sales of fuel efficient cars to the socially desirable amount. Hint the government is trying to affect production through costs, not benefits.

Q7. Fed Sees Unemployment and Inflation Rising It is May 2008 and the Fed is confronted with a rising unemployment rate and rising inflation. Source: CNN, May, 21, 2008

   a. Explain the dilemma faced by the Fed in May 2008.

   b. Why might the Fed decide to cut the interest rate in the months after May 2008?

   c. Why might the Fed have decided to raise the interest rate in the months after May    2008?

Consider a small open economy with the following information:

C = 50 + 0.80 (Y

I = 200 – 2,000r

𝑵𝑿 = 𝟏𝟎𝟎 − 𝟐𝟓𝜺 (𝑴/𝑷)𝒅 = 𝒀 − 𝟒, 𝟎𝟎𝟎𝒓 G = 300

T = 300 M = 4,000 P= 4

𝒓∗ = 𝟓%

̶ T)

 a. Estimate the equilibrium exchange rate, level of income, and net exports in the economy. (10 marks)

b. Suppose the economy is under a floating exchange rate. Due to the COVID-19 pandemic, the government increases its spending by 100. Estimate the exchange rate, the level of income, net exports and the money supply.

Suppose that gold price rises in south africa. Using a graph, explain how this rise in the gold price will affect the exchange rate between the south african Rand and the US dollar.

The demand and supply for a good are described by the following functions: Q_(p) = 3000 – 10p and Q_(p) = 2000 + 10p. If Government impose a tax of RON 20 for each unit of product sold, the tax burden will be shared:

COVID-19 all around the world has restricted the economic activity. To stop the spread of the virus Pakistan like many other countries adopted the policy of smart lockdown. Shutting down of the industry has created adverse supply shock in the economy. While, the slowdown in business and economic activities the country is in the recessionary phase of the business cycle as the GDP growth for the FY 2020-21 is expected to be -0.2 accompanied by high unemployment and poverty rate.

a. Reflecting on the above situation justify whether the State Bank of Pakistan should opt for easy or tight monetary policy as a stabilization policy. Also illustrate it graphically.

(2.5 Marks, Maximum 200 words)

b. Reflecting on the above situation justify whether the Government of Pakistan should opt for expansionary or contractionary fiscal policy as a stabilization policy. Also illustrate it graphically.