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ECO-403 Assignment No 2 Solution & Discussion Due Date: 07-06-2012
SEMESTER SPRING 2012
Macroeconomics (ECO403)
Assignment No. 02
Due Date: 07th June, 2012 Marks: 25
Assignment:
Many under developed countries are making their economies strong with the
passage of time. Senegal is one of them. After an economic contraction of 2.1% in
1990s, Senegal originated a major economic reform program with the support of
international donor community (IDC). Senegal is an under developed country
located in West Africa. The main industries are food processing, cement, fertilizer,
textile and tourism while exports include fish, fabrics and cotton. Major source of
revenue of the people of Senegal is tourism and agriculture sector. Known for its
mild climate, attractive forest, beaches and great fishing, Senegal has been highly
regarded by Europeans and Middle East tourists. Suppose for the development of
these places, government of Senegal increased its spending by Rs.7 million. This
spending not only attracted the tourists but also increased the consumption,
production and employment rate of the people of Senegal. Before this government
spending, marginal propensity to consume (MPC) was 0.5 while after this
spending, it became 0.7. As marginal propensity to consume had been changed
from 0.5 to 0.7, government of Senegal increased the tax rates; which in turn
increased the government revenue.
Requirements:
Part A:
Keeping in view the above data, calculate:
a. Government spending multiplier when MPC =0.5 and MPC = 0.7.
b. Tax multiplier when MPC =0.7.
c. Marginal propensity to save (MPS) of this economy when MPC =0.5 and MPC
= 0.7
Part B:
a. If government spending increases by 7 million, could total GDP increase by
Rs.7 million?
b. If MPC =0.7, by how much amount, GDP will decrease if taxes are increased
by 7 million.
(Marks =Part A=6+4+5, Part B=3+7)
Instructions:
Please read the following instructions carefully before preparing the assignment solution:
Write down formula and all relevant steps involved in calculations.
Calculate to the point where calculation is being required. NO need to write
irrelevant material or extra interpretation.
This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 01 to lecture no 26 and reading handouts as well as
recommended text book.
Video lectures can be downloaded for free from www.youtube.com/vu
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Spring 2012_ECO403_2.pdf, 55 KB
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Replies to This Discussion
-
Permalink Reply by Alijankhan*(Admin) on -
Part A:
a. Government spending multiplier when MPC =0.5 and MPC = 0.7.
If MPC = 0.5
And government spending = 1/1-MPC
=1/1-0.5 =2
If MPC = 0.7
And government spending = 1/1-MPC
=1/1-0.7 = 3.3
b. Tax multiplier when MPC =0.7.
Where tax multiplier
= -MPC/1-MPC
=-0.7/1-0.7 = -2.3
c. Marginal propensity to save (MPS) of this economy when MPC =0.5 and MPC
= 0.7
When MPC = 0.5
MPS = 1-MPC
=1-0.5 = 0.5
When MPC = 0.7
=1-0.7 =0.3
Part B:
a. If government spending increases by 7 million, could total GDP increase by
Rs.7 million?
Yes, If government spending increases with 7 million, GDP also increases by 7 millionb. If MPC=0.7, by how much amount, GDP will be decrease if taxes are increase by 7 million.
Answer;
∆Y = (-MPC/1-MPC)* ∆T
= (-0.7/1-0.7)*7
= (-0.7/0.3)*7
= -2.33*7
= -16.1 -
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Permalink Reply by tooba ejaz on -
THANKS A LOT gOD BLESS :)
-
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Permalink Reply by Alijankhan*(Admin) on
-
b. If MPC=0.7, by how much amount, GDP will be decrease if taxes are increase by 7 million.
Answer;
∆Y = (-MPC/1-MPC)* ∆T
= (-0.7/1-0.7)*7
= (-0.7/0.3)*7
= -2.33*7
= -16.1 -
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Permalink Reply by Alijankhan*(Admin) on
-
Part A:
a. [COLOR=#0000FF !important]Government[/COLOR] spending multiplier when MPC =0.5 and MPC = 0.7.
If MPC = 0.5
And government spending = 1/1-MPC
=1/1-0.5 =2
If MPC = 0.7
And government spending = 1/1-MPC
=1/1-0.7 = 3.3b. Tax multiplier when MPC =0.7.
Where tax multiplier
= -MPC/1-MPC
=-0.7/1-0.7 = -2.3c. Marginal propensity to save (MPS) of this economy when MPC =0.5 and MPC
= 0.7When MPC = 0.5
MPS = 1-MPC
=1-0.5 = 0.5When MPC = 0.7
=1-0.7 =0.3 -
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Permalink Reply by Alijankhan*(Admin) on
-
tax multiplier ka formula ki a -MPC/1-MPC nhi hai
book me tu yhe hai so plz clear this
so i think answer is -2.3 may be -
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