ECO401 Latest Final Term Paper July 2011
Total Question:64
4 Question of 5 Marks
And 3 Question of 3Marks
Mcq’s mostly from past papers
Q: Define current account deficit ??? hw to reduce current account defict? Marks
CURRENT ACCOUNT DEFICIT
Current account is very much important in order to maintain the long term sustainability of the balance of payment.
Recall the equilibrium condition of the economy is where withdrawals equal the injections.
W = J
S + T + M = I + G + X
M – X = I – S + G – T
Current account deficit = Private sector resource deficit + Government budget deficit Japan and Korean economy remained in high current account deficit due to high private sector resource deficit. This deficit arises when firms want to invest more and debts that are taken to finance the current account deficit go for the investment of the firms. Government spending and household consumption was not being financed. African and Latin American economies were also remained in high current account deficit. But this deficit was due to the higher consumption expenditures by the households and consumers. This caused worsen the debt problems of these countries.
HOW TO REDUCE CURRENT ACCOUNT DEFICIT?
Devaluation can help in this regard. Devaluation causes an increase in exports and decrease in imports leading to reduction in current account deficit. But this policy also not successful empirically due to several reasons in many countries.
Q:Explain the shape of money demand curve with the help of diagram.? 5Marks
Answer:
Money demand Md increases with income levels.
Money demand Md falls with interest rates.
In this concept we are talking about real income and real interest rate not the
nominal income and nominal interest rate.
So this implies to the demand of real money.
Whether nominal and real money supply is equal or not depends much on the
assumption regarding prices. If prices are assumed fixed, then the two are equal,
otherwise not.
As you can see from the diagram where money demand in on the x-axis and
income is on the y-axis, and there are various level showns like L1,L2,L3.
Diagram u can see on 192
Q: Discuss the assests and liabilities sides of central bank? 5Marks
Balance sheet of a central bank
Assets Side:
Loans to Govt
Forex reserves
Loans to private sector
Liabilities side:
Notes, coins & currency in circulation
Govt & commercial bank deposits
Liquidity paper issued
Q: Drive the equation of Money Multiplier with the help of income and consumption equation? 5Marks
Answer:
By Putting the value of ‘C’
Y = a + bY + I + G + NX
Y – bY = a + I + G + NX
Y = a + I + G + NX /1 -b= 1/1 -b (a + I + G + NX)
k = 1/1- b
Q: Difference between Personal income and deposable personal income? 3Marks
Answer:
Personal income of an individual is the total amount of income s/he receives form deploying all the different factors of production s/he owns. Aggregate personal income is just the above definition aggregated for the whole of the economy. The total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time, usually one year. The primary use of personal income is to measure the income actually paid out to the household sector. After adjusting for income taxes, personal income forms the basis for consumption expenditures on gross domestic product.
Disposable income is obtained by subtracting the amount of direct taxes from the personal income of the person. Aggregate holds as above as well. The total income that can be used by the household sector for either consumption or saving during a given period of time, usually one year. This is the income left over after income taxes and social security taxes are removed and government transfer payments, like welfare, social security benefits, or unemployment compensation are added.
Q: What is the Exogenous growth model? 3Marks
EXOGENOUS GROWTH THEORY
The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is a term used to sum up the contributions of various authors to a model of long-run economic growth within the framework of neoclassical economics. The most important contribution was probably the work done by Robert Solow; Solow received the 1987 Nobel Prize in Economics for his work on the model. The key assumption of the neoclassical growth model is that capital is subject to diminishing returns. Given a fixed stock of labor, the impact on output of the last unit of capital accumulated will always be less than the one before. Assuming for simplicity no technological progress or labor force
growth, diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation. At this point, because of the assumptions of no technological progress or labor force growth, the economy ceases to grow.
Q: Monopolistic competition ki aik diagrame thi usko describe kerna tha? 3Marks
Total Question:64
4 Question of 5 Marks
And 3 Question of 3Marks
Mcq’s mostly from past papers
Subjective Part
Q: Define current account deficit ??? hw to reduce current account defict? Marks
CURRENT ACCOUNT DEFICIT
Current account is very much important in order to maintain the long term sustainability of the balance of payment.
Recall the equilibrium condition of the economy is where withdrawals equal the injections.
W = J
S + T + M = I + G + X
M – X = I – S + G – T
Current account deficit = Private sector resource deficit + Government budget deficit Japan and Korean economy remained in high current account deficit due to high private sector resource deficit. This deficit arises when firms want to invest more and debts that are taken to finance the current account deficit go for the investment of the firms. Government spending and household consumption was not being financed. African and Latin American economies were also remained in high current account deficit. But this deficit was due to the higher consumption expenditures by the households and consumers. This caused worsen the debt problems of these countries.
HOW TO REDUCE CURRENT ACCOUNT DEFICIT?
Devaluation can help in this regard. Devaluation causes an increase in exports and decrease in imports leading to reduction in current account deficit. But this policy also not successful empirically due to several reasons in many countries.
Q:Explain the shape of money demand curve with the help of diagram.? 5Marks
Answer:
Money demand Md increases with income levels.
Money demand Md falls with interest rates.
In this concept we are talking about real income and real interest rate not the
nominal income and nominal interest rate.
So this implies to the demand of real money.
Whether nominal and real money supply is equal or not depends much on the
assumption regarding prices. If prices are assumed fixed, then the two are equal,
otherwise not.
As you can see from the diagram where money demand in on the x-axis and
income is on the y-axis, and there are various level showns like L1,L2,L3.
Diagram u can see on 192
Q: Discuss the assests and liabilities sides of central bank? 5Marks
Balance sheet of a central bank
Assets Side:
Loans to Govt
Forex reserves
Loans to private sector
Liabilities side:
Notes, coins & currency in circulation
Govt & commercial bank deposits
Liquidity paper issued
Q: Drive the equation of Money Multiplier with the help of income and consumption equation? 5Marks
Y = C + I + G + NX
C = a + bY
By Putting the value of ‘C’
Y = a + bY + I + G + NX
Y – bY = a + I + G + NX
Y = a + I + G + NX /1 -b= 1/1 -b (a + I + G + NX)
k = 1/1- b
Q: Difference between Personal income and deposable personal income? 3Marks
Answer:
Personal income of an individual is the total amount of income s/he receives form deploying all the different factors of production s/he owns. Aggregate personal income is just the above definition aggregated for the whole of the economy. The total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time, usually one year. The primary use of personal income is to measure the income actually paid out to the household sector. After adjusting for income taxes, personal income forms the basis for consumption expenditures on gross domestic product.
Disposable income is obtained by subtracting the amount of direct taxes from the personal income of the person. Aggregate holds as above as well. The total income that can be used by the household sector for either consumption or saving during a given period of time, usually one year. This is the income left over after income taxes and social security taxes are removed and government transfer payments, like welfare, social security benefits, or unemployment compensation are added.
Q: What is the Exogenous growth model? 3Marks
EXOGENOUS GROWTH THEORY
The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is a term used to sum up the contributions of various authors to a model of long-run economic growth within the framework of neoclassical economics. The most important contribution was probably the work done by Robert Solow; Solow received the 1987 Nobel Prize in Economics for his work on the model. The key assumption of the neoclassical growth model is that capital is subject to diminishing returns. Given a fixed stock of labor, the impact on output of the last unit of capital accumulated will always be less than the one before. Assuming for simplicity no technological progress or labor force
growth, diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation. At this point, because of the assumptions of no technological progress or labor force growth, the economy ceases to grow.
Q: Monopolistic competition ki aik diagrame thi usko describe kerna tha? 3Marks
