ECO401 Final Term Subjective

ECO401 Subjective Material

Q55. According to Keynesian school of thought, what should be the role of government in order to bring the economy out of depression? (3 marks)

Answer No: 55 Keynes introduced demand-pull theory which emphasizes strongly the intervention of government into economy. According to him economy may be boosted up by increasing expenditure. In the initial stage government can inject money in the form of investment and higher wage rate to the government employees. This will create higher demand which in return result in more investment by firms.

Q56. In the above figure, suppose the economy is on the horizontal portion of aggregate supply (AS) curve. (5 marks)

1. If government expenditures increase, what will happen to the

aggregate expenditure line E, aggregate demand curve AD and output level Y.

It will cause more short run demand in the economy and “e” will move to the right in P-Y space. It will increase the consumption part of injection as well and “e” will move upward and right in W.J-Y space. AD will curve will move to right in P-Y space resulting increasing short run output “Y”. b) Is there any multiplier effect? How it works in this case? Yes, multiplier effect exists there. Keynes multiplier 1/mps is the variable which determines the injection level to create an hypothetical desired output. (Marks: 3+2)

Q57. World Bank suggests some structural reform policies for the poor countries to grow. Discuss those policies briefly. (5 marks)

Answer No: 57 These are also called IMF’s Stabilization Policies. These were concluded from neoclassical economics, known since 1990. The objective of IMF was to ensure both through internal balance (supply=demand, i.e. low inflation, full employment) and external balance (sustainable BOP and external debt position). The approach was “stabilization” through “demand” management. There are three tools of this policy as follows!

• Tight Monetary Policy
• Tight Fiscal Policy
• Devaluation

IMF Policies effected LIC’s badly. There was a very high criticism on above said policies. The main points of criticism were as follows!

• Short-term policy conflicts
• Devaluation could raise prices of imports.
• Demand-reduction policies are anti-growth: increased taxation can stifle the

productive sector.

• Stabilization hurts the poor expenditure cuts almost always fall partly on the

social sectors.

Q58. (10 marks)

1. Money supply (M) =100, Price (P) = 3 and real output (Q) = 200.

MV = PQ 100xV = 3 x 200 V = 600 / 100 V = 6 b) Velocity of money (V) = 4, Price (P) = 5 and output (Q) =100.

MV = PQ M x 4 = 5 x 100 M = 500 / 4 M = 125 c) Money supply (M) = 200, velocity of money (V) = 7 and output (Q) =

700. Calculate the missing figure.

Answer No: 58 (c) MV = PQ 200 x 7 = P x 700 P = 1400 / 700 P = 2 d) Money supply (M) =150, velocity of money (V) = 8, Price level (P) =

3. Calculate the missing value.

Answer No: 58 ( d ) MV = PQ 150 x 8 = 3 x Q Q = 1200 / 3 Q = 400 (Marks: 2.5 each)

Q51. Briefly discuss the private cost of advertising. How we can calculate the marginal social cost? (5 marks)

Answer: Private Cost Of Advertising: The private cost of advertising is the cost incurred by firm in making the advertisement i.e newspaper adds, tv commercials etc. The firms do not take into account the nuisance faced by

people due to these advertisements otherwise the firms would do less