BAHRIA UNIVERSITY (KARACHI CAMPUS)

Midterm Assessment Assignment Spring 2020

Course Title: MACROECONOMICS Course Code:
Class/Sec: BBA-2A,B,C,D,E,G,H,I. Course Instructors: S Ghayyur Alam / S. Kamran
Abbas / Dr. Faizan / MadihaHussaini / Nasir Ali

Submission: Latest by 31 May 2020 Max Marks: 15

Student’s Name: ____________________ Reg. No: _________

Assignment Guidelines by the Teacher

 Assignment Submission: Manuscript / Computer Typed / Optional

(3 marks)
Q1. Suppose the following Business School is a closed economy. The only good/service produced
& consumed at Business School is BBA graduates.

(a) Fill in the following table if the base year is 2016.

Years No. of Business School Price Nominal GDP Real GDP

students(Quantity)

    (Tuition fee)    

2015 80 200000 16000000 16800000

2016 100 210000 21000000 21000000
2017 110 220000 24200000 23100000
2018 100 240000 24000000 21000000
2019 120 310000 37200000 25200000
(b). Calculate the rate of inflation for 2019 taking 2016 as base year.

For inflation calculation we need GDP Inflator , here is calculated GDP Inflator for each year

GDP Deflator
GDP Deflator (Nominal GDP/Real GDP) * 100
2015 95.24
2016 100 (base year deflator is always 100)
2017 104.76
2018 114.29
2019 147.62

Now Inflation for 2019

As we known inflation is equal to the growth rate of the GDP Deflator.

The growth rate formula is = ((year2-year1)/year1) * 100

Inflation 2019 = ((147.62-114.29)/114.29) * 100

Inflation 2019 = 29.17%

Q2. Case Application: (03 marks)

a) W
ha
t
do

you understand by the terms crowding out and recession from the above case study?

Answer: Through this case study I can understand that when countries run budget deficits,
they typically pay for them by borrowing money. When governments borrow, they compete
with everybody else in the economy who wants to borrow the limited amount of savings
available. As a result of this competition, the real interest rate increases and private
investment decreases. This is phenomenon is called crowding out. And having budget
deficits and keep on borrowing money as USA doing 0.4 dollar against 1 dollar spending this
all are sign of recessions

b) Few of the economists think that it will cause financial crisis in USA and government’s
deficit will increase. Should government increase taxes and cut government spending to
overcome this financial collapse?
 Answer: Yes as economics thought about financial crisis is really bad sign for USA and it
would obviously lead to raise in budget deficit. So to overcome this USA first need to control
the expenditures, used expenditure cutting based approach by cut government standing
other way is all about increasing government taxes, it can be more weight on public but this
is an alternative way. USA need to make an optimal point to overcome this financial collapse
by creating balanced through increases tax which will increase their total earnings and on
other side need to decrease the government expenditure, through tis they can overcome
this financial collapse.

c) If Chinese Yuan appreciates against US dollar how it will affect US debt liabilities.

If Chines yuan appreciated against USA dollar it will increase the USA Liabilities. As case
study said china is creditor to USA, USA will pay the debt to china in Chinese Yuan, By
appreciating the Chinese Yuan will lower the value of dollar, and which will increase the debt
and interest value and USA all need to pay more dollar to pay China in Chinese Yuan. So
there is increase effect in USA debt liabilities with appreciate of Chinese currency against
USA currency.

Q3. Evaluate the following statements: (True/False with reasoning) (03 marks)

a) Value of a country’s GNP is always greater than value of its GDP in a given year.

Answer: True
Reasoning: GNP is always greater than value its GDP in a given year because GDP is used to
calculate the total value of the goods and services produced within a country’s borders,
while Gross National Product (GNP) is used to calculate the total value of the goods and
services produced by the residents of a country, no matter their location. So this mean
GNP measures the value of goods and services produced by only a country's citizens but
both domestically and abroad

b) Increase in economic growth in a home country will increase its export revenue and
foreign reserves.

Answer: True
Reasoning: Economic growth could increase exports. In a period of economic growth, firms
have more money to invest. This investment could increase the long run productivity of the
economy and therefore, could help boost exports. In a recession, firms will be more
reluctant to invest, and therefore, there will be a slower growth in exports.
We can also know that economic growth increase mean there is increase in foreign direct
investment as FDI considered key role in economic growth so rise in foreign direct
investment mean rise in foreign reserve this conclude that increase in economic growth will
increase foreign reserve

c) If the marginal propensity to consume (MPC) increases then government expenditure

multiplier also increases
 Answer: True
Reasoning: As we know MPC is key element to calculate the government expenditure
multiplier, there is rule of economic higher the MPC higher the government expenditure
multiplier. More consume will increase the value of expenditure so Government expenditure
multiplier is directly proportional to MPC.

(03 marks)
Q4.
a) Consider a small economy where the total population is 100,000. The size of the labor
force is 80,000, while the number of people employed is 70,000. What is the
unemployment rate in this economy?

Answer:

As we know Unemployment rate = (Unemployed people/Total Labor force) * 100

Here given values are
Labor force = 80000
Unemployed people = 80000 – 70000 = 10000
So
Unemployment rate = (10000/80000) * 100
Unemployment rate = 12.5 %

b) What are the consequences of unemployment?

Answer:

 There are many obvious and well-documented social problems which are caused by
unemployment. Because of the increased spare time and stress there will be an
increase in the rates of alcoholism, drug abuse and domestic violence.

 Moreover, high unemployment often results in increased marriage breakdown,

divisions and discrimination in society, suicide rates and crime rates especially among
the young

 The financial problems which are rising from prolonged unemployment. It is known
that we cannot buy anything without money; the constant income buys food,
clothing and shelter. Due to the loss of income, unemployed individuals will be
unable to earn money to meet financial obligations. For example, people who fail to
pay mortgage payments or to pay rent will lose their housing properties and become
homeless. Unemployment also prevents one from doing many things and involving in
different activities e.g. travelling. Consequently, this affects the national economy
leads to poverty. As a result of the financial crisis and the reduced overall purchasing
capacity of a country the unemployed individuals are unable to maintain the
minimum standard of living. 
 c) How does Phillips curve is associated with unemployment?

Answer:
The Phillips curve shows the inverse relationship between inflation and unemployment: as
unemployment decreases, inflation increases. The Phillips curve relates the rate of inflation
with the rate of unemployment. The Phillips curve argues that unemployment and inflation
are inversely related: as levels of unemployment decrease, inflation increases. The
relationship, however, is not linear. Graphically, the short-run Phillips curve traces an L-
shape when the unemployment rate is on the x-axis and the inflation rate is on the y-axis.

(1.5 Marks each)

Q5
a. If the consumption function is given as C=$25+0.8Yd, (where Yd =Y- tY), Tax rate(t) = 10%,
Investment=$50, and Government spending=$50, calculate the equilibrium level of income
as well as the government expenditure multiplier.

Answer:

Equilibrium level of Income

Solve for the short run equilibrium output using the Keynesian Model. Use the fact that
Output = Y = C + I + G n equilibrium.
C = Consumption function = 25 + 0.8(Y-T)
T = Net Taxes = 10%
G = Government Spending = 50
I = Investment Spending = 50
Closed economy Y = C + I + G in equilibrium
Y = 25 + 0.8(Y-10) + 50 + 50
Y = 125 + 0.8Y – 8
Y = 117 + 0.8y
Y – 0.8y = 117
0.2y = 117
Y = 117/0.2
Y = 585

Government Expenditure Multiplier

Suppose government expenditure increase by $20

So now Equilibrium of income will be
Y = 25 + 0.8(Y-10) + 50 + 70
Y= 145 + 0.8y – 8
Y – 0.8y = 137
Y = 137/0.2
Y = 685
Thus as result increase in G by $20 equilibrium increase by $100
So Government expenditure multiplier = 100/20 = 5

b. Draw a graph which represents the above equilibrium level income and expenditures.
 Equilibrium level income and expenditures.
1000 885
900 785
800 685
Equilibrium income
700 585
600
500
400
300
200
100
0
40 50 60 70 80 90 100 110 120
Government Expedniture