Airport Campus

Student’s Name & USMAN

ID: SALAHUDDIN 11382
Subject: Macroeconomics Submission Day: Saturday
Instructor: Asif Z. Warsi Submission Date: 13th of June, 2020
Submission Time: 06:00 PM
Program: BBA (Before)
Section: Saturday - 1050 Max. marks: 30

Department of Business Administration

Final Exam (Take Home) – Spring 2020

Instructions:

1. Read and attempt all the questions carefully.

2. Organize your work clearly, neatly, and legibly with page numbers in footer.
3. Write answer to each of the questions in not more than 300 words.
4. You are not allowed to change the sequence of questions or any part.
5. You are allowed to draw graphs in plane paper and insert a scan copy.
6. This exam will test your ability to examine, explain, modify or develop concepts
discussed in class.
7. Exam answers will also be checked through Turnitin for originality.
8. Do not share your answer with any classmate or member. Otherwise, you will be
penalized by deduction in your marks.
9. The total marks for the final exam are 30 marks.
10. We have extended the duration of the exam to give you time to download the paper,
write your answers and upload them.
11. Each student has to submit complete question paper with answers on a Word
Document and submit the soft copy through VLE.
12. Your answer should be typed, single-spaced on standard-sized paper, with 1″ Normal
margins for all sides.
13. You should use a clear font that is highly readable; 12 pt. Times New Roman font.

_________________
Instructor's Signature
Estimated Time: 30 Minutes 05 Marks

Q-1: The following data summarize the expenditures for the country of XYZ during 2013 in
millions of alphabet, the currency of country XYZ.

Gross Private Domestic Investment $300

Business Fixed Investment $200
Change in Inventories $100
Exports $200
Imports $200
Personal Consumption Expenditures $800
Government Consumption Expenditures and
Gross Investment $500
Statistical Discrepancy $10
Depreciation Expenditures $50

a) Calculate net exports

b) Calculate GDP

c) Calculate national income

d) Assume that the GDP deflator is 120 and calculate real GDP for 2013.

Answer 1:

PART a)

“Net Exports” Calculation is as follow:

Net exports = Exports - Imports

= $200 - $200

= $0

The net export are = $0

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PART b)

“GDP” Calculation is as follow:

GDP = C + I + G + ( X – M )

Gross Domestic Product = Consumption Expenditure + Gross Private

Domestic + Investment + Government Spending on goods and services

+ (exports – imports)

GDP = $800 + $300 + $500 + ($200 - $200)

GDP = $1,600

The GDP of the country is $1,600

PART c)

“National Income” Calculation is as follow:

National Income = GDP – Depreciation

= $1,600 - $50

= $1,550

The National Income of country is $1,550

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PART d)

“Real GDP of 2013” Calculation is as follow:

Real GDP =Nominal GDP/GDP deflator x 100

Real GDP =1600/120 x 100

Real GDP = $1,333.33

The REAL GDP for year 2013 was $1,333.33

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Estimated Time: 10 Minutes 02 Marks

Q-2: Many financial analysts use GDP as a measure of the economy's performance. However,
GDP has several shortcomings in terms of measuring economic well-being. State at least three
such shortcomings and explain how each affects the validity of GDP as a measure of economic
well-being.

Answer 2:

1. GDP does not count number the impact of enjoyment time. It approach let

suppose economy have equal preferred of residing however one economy has

greater running time than others allow suppose in one economy it's miles 10 hours

in which in others financial system it's miles 7 hours. So this impact of 3 hours

amusement time or blessings of this 3 hours enjoyment time are not taken into

consideration by means of GDP. V) GDP does no longer account the pollution

price.

2. GDP does not count number the black economy or the sector of products and

offerings which do no longer have any official record. It approach GDP does no

longer be counted many sports and price of many goods and offerings which has

no file. Its miles form of parallel economic system or black financial system and it

is going through with formal economy. This financial system in no way comes

underneath the attention of GDP.

3. GDP counting does no longer don't forget any distribution of income. If the
economic system's earnings are very skewed allotted then it does now not have
any effect on GDP counting. If some sections have many incomes where the
others don't then it will now not show it.

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Estimated Time: 10 Minutes 02 Marks

Q-3: Distinguish between real and nominal GDP. Which one is a better measure of the
business cycle?

The nominal GDP is the sum of all the final goods and services generated by an economy over a

given year. It is determined by using the current prices in the year the product is generated in. In

economics it expresses a nominal value in monetary terms. For example, because of changes in

quantity and price a nominal value can change. The nominal GDP takes into account all

adjustments that occurred over the course of a given year for all goods and services produced. If

prices change from one time to the next and production does not change, the nominal GDP will

change given the constant production.

The actual GDP is the cumulative value of all the final goods and services that an economy

generates, adjusted for inflation, within a given year. The estimate is based on the prices of a

chosen base year. In order to calculate Real GDP, you must determine how much GDP has

changed since the base year due to inflation, and divide the inflation every year. So, actual GDP

accounts for the fact that if prices change but production does not change, nominal GDP will

change.

Accordingly to my opinion Real GDP is a better measure because it is corrected for

inflation.  Nominal GDP can increase if output or price increases but Real GDP increases only if

output increases.

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Estimated Time: 10 Minutes 02 Marks

Q-4: The actual unemployment rate exceeds the natural rate of unemployment. What are
policymakers concerned about in this situation?

Answer 4:
Policymakers in economy are the one who accept or create policy accordingly to the situation to

the following country, as the in economy it state that the economy will fall down when the

actual unemployment rate increases the natural rate of unemployment.

 The natural rate of unemployment is frictional, structural and additional unemployment

combined. This generally takes place in an economy which is growing and where labor and the

resources are said to be in equilibrium. In such kind of unemployment the people are jobless for

some time and until they find a new job, is known as natural rate of unemployment. The

policymaker is always tried to balance the economy so as the economy is down fall, the

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government can cut the taxes and more and more trade should be done. And more policies are

being setup. The fall-down also occur when there is lack of demand, so the balance will be done

on decreasing the goods and service prices.

Estimated Time: 10 Minutes 02 Marks

Q-5: What is the relationship between unemployment and the price level in the short run? (Hint:
Business Cycle)

There is a negative connection between the value level and joblessness in the short run. So, if

you plot the price level on the y-axis and unemployment rate on the y-axis, then you will have a

downward sloping curve as the relationship, known as the Phillips curve.

The reason behind this negative relationship is the fact that wages are set in advance and for

quite a long duration, like 2 to 3 years in the US. So, while setting the wages, workers take the

future expected price level into the account as they are not concerned with nominal wages, but

real wages = nominal wages/price level i.e. wages in terms of the real goods. So, when the actual

price level turns out to be higher than the expected price level, real wages are lower and it is

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profitable for the firm to produce more and hire more workers. So as the price level increases,

unemployment rate falls and so forth.

Estimated Time: 10 Minutes 02 Marks

Q-6: What are the two policy options used to influence the economy?

Answer 6:

There are two policies which are influenced economy

One is Fiscal policy and another one is Monetary policy. In an economy, if any government will

change effective demand while changing government expenditure or consumer expenditure. It

will directly effectively demand, which will expand the total output of the economy, where

monetary policy will take when the inflationary situation arises. The government can reduce

money supply in economy; it will decrease effective demand in the economy to reduce output.

But to eradicate the deflationary situation, the government will increase the money supply. This

will help to increase effective supply

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Estimated Time: 30 Minutes 05 Marks

Q-7: Refer to the information provided in Scenario below to answer the questions that follow.

SCENARIO: The following table shows the changes in deposits, reserves, and loans of 4 banks
as a result of a $100,000 initial deposit in Bank No. 1. Assume all banks are loaned up.

a) What is the required reserve ratio?

b) What is the money multiplier in this economy?

c) Based on the initial $100,000 deposit, the money supply will, at most, expand to how
much?

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 d) If the required reserve ratio were changed to 10%, total loans of Bank No. 2 will change
to

Answer 7:

PART a)

(Required reserve ratio = ℜquir ed reserves /¿deposits)

4,750
=
95,000

= 0.05

= 5% ( in percentage )

PART b)

Money multiplier = 1/required reserve ratio

= 1/0.05

= 20

PART c)

(Money supply expansion = Initial deposit/required reserve ratio)

Change in Money supply = Deposit X 20

= $100, 00 X 20

= 2million dollars.

PART d)
Deposit in Bank 2 = Excess reserves of Bank 1

= 100000 x (1 - 0.1)

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= $90000

Loans of Bank 2 = Deposit in Bank 2 - required reserve

= 90000 - 90000 x 0.1

= 81000

Estimated Time: 30 Minutes 05 Marks

Q-8: What are the five major reasons for government involvement in a market economy?
Explain each reason in few lines.

The authority tries to fight marketplace inequities through regulation, taxation, and subsidies.
Governments may intrude in markets to promote general economic equity. Maximizing social
welfare is one of the most common and pleasant understood motives for government
intervention.
The major reasons for government involvement in a market economy are:

1. Maximizing Social Welfare: In an unregulated inefficient market, cartels and other

types of organizations can wield monopolistic power, raising entry costs and limiting the

development of infrastructure.

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 2. For the rental market: In a few countries there may be a well-known lifestyle of renting
for having access to lodging, rather than assuming all households have to obtain domestic
possession. At instances, renting is less expensive than buying.

Estimated Time: 30 Minutes 05 Marks

Q-9: 'Keynesian policies to solve the problem of unemployment will not work because they will
conflict with the attainment if other key Macroeconomic aims'

Discuss this view in detail.

Answer 9:
As many of the economist believe in Keynesian policies as compare to the classical theory, but

when the time changes no one is aware about it. Likewise the concept and theory which the

economist applies the most is the Keynesian policies of unemployment might be un-follow in

future as many more theory will be set. In today era the Classical policies of unemployment is

also in opponent to the 'Keynesian policies. If in future there will be an attainment in economic

in place of Keynesian policies. As conflict was always the part of human nature likewise there

are many theory which are against of 'Keynesian policies so if the newly attainment will be done

by economist then 'Keynesian policies will not be workable for the unemployment theory.

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