ECO401 Solved Subjective Set 2

ECO401- Final Term · Subjective · Current Paper 20 July 2013

What is meant by non price competition?

Non price competition means competition amongst the firms based on factors other than price, e.g. advertising expenditure, product differentiation etc

What is meant by exchange rate? Also give example of exchange rate

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.

For example, the higher the exchange rate for one Dollar in terms of one r=Rupee, the lower the relative value of the Rupee

Exchange rate (also known as the foreign-exchange rate, forex rate or FX rate)

Why government needs to revalue its currency?

Revaluation of Currency is the act of increasing the price (exchange rate) of one nation's currency in terms of other currencies. Government revalues its currency to raise the price of the country's exports and lower the price of foreign imports.

Procedure for revaluation is for the government to buy the nation's currency and/or sell foreign currencies through the foreign exchange market.

Write the key variables for macro economic model

The key variables for a macroeconomic model are: Y = Income C = Consumption S = Savings I = Investment T = Taxes G = Government Expenditures M = Imports X = Exports

Circular flow of goods and income for firms and households

Circular flow of income producers receive the amount what consumers spend. All expenditures from consumers/individuals become the income of the producers, and the expenditures of the producers become the income of the consumers/individuals.

What is the reason of poverty in developing countries according to Prebisch-Singer hypothesis? 3 - Marks

Reason of poverty in developing countries according to Prebisch-Singer hypothesis

•  They were stuck in the production of primary products
•  Lack of human, social and public capital
•  Very fast rising populations
•  Lack of natural resources (like oil, gold, gas, iron, copper etc.)

Discuss the components on the assets and liabilities side of the balance sheet of a central bank

Assets side of SBP’s balance sheet, (1) The country’s foreign exchange reserves (foreign currencies, gold and silver reserves; either held domestically or invested abroad) (2) Credit to government: this would include any SBP lending to government, including in the form of any outstanding (i.e. yet to mature) treasury bonds and bills lying with the SBP (3) Credit to banks: this would include any advances (another name for loans) extended by SBP to commercial banks. Liabilities side of SBP’s balance sheet,

4. Notes and coins in circulation (i.e. M0). Note that for a currency-issuer (SBP in our case), the currency is a liability, not an asset;

(5) Government or banks’ deposits: these would include any positive account6 balances held by commercial banks and/or the government; (6) Outstanding liquidity paper issued: this would include any bills issued by the central bank for the purpose of mopping up liquidity from the financial system.

PAST SUBJECTIVE

Why Marginal Revenue and price are equal under perfect competition?

In perfect competition a firm that changes the quantity they sell does not affect price, therefore marginal revenue is equal to price.

On what factors steady state growth rate of real GDP depends? (3)

The steady-state growth rate of real GDP depends on n and t, the exogenous rates of growth of population and technology

When does real wage unemployment occur in an economy? (3)

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. This is often as a result of government intervention, as with the minimum wage, or unions