Question1.

Given:C =250+0.8Y (3+3+3+4+3+3+4=23)I =150 G=300 TR = 100 NX=

100 t=0.25

i) Findtheequilibriumlevelofincome.

Answer:

Equilibrium level of income:

Y= C+ I+G + NX

Y= [250 + 0.8(Y+TR-tY)]+I + G +NX

Y=[ 250+ 0.8Y+(0.8 *100)– (0.8*2.05Y)]+ 150+300 +100Y= 880

+ 0.8Y- 0.2Y

0.4Y= 880

Y=$2200(Equilibriumincome)

ii) Suppose,because ofthecurrentCOVID19situationCfallsto50,MPSfallsto.05,I

falls to 10, G falls to 100 and NX falls to 10. How much TR should
thegovernmentincreasetohavethe samelevel ofequilibriumincome asinparti)?

Answer:

MPS=0.05,i.e. MPC=0.95so,c=50+0.95Y

Now,Y=C+I+G+NX
Y=50+0.95(Y–tY+TR) +10+100+10
2200 = 170 + 0.95 (Y- 0.25Y+TR)
2200= 170 + 0.71Y+0.95TR
2200= 170 + ( 0.71 ×2200 ) + 0.95TR
2200= 170 + 1562 +0.95TR
0.95TR= 468
⸫TR=492.63

⸫TRshouldbe increasedby ( 492.63 – 100 ) = 392.63 to maintainthe samelevelofY.

iii) Indeterminingtherequired changeinTRinpart ii),whichmultiplierdidyouuseand
why? (Hint: keep in mind the consumption tendency households may haveunder
theCOVID19 situationinselecting the multiplier)

Answer:

BecauseofCOVID19situation,the consumption tendency of house holds is likely.

Inthe previousquestion,theconsumptionfallsfrom$250to$50( Assuming is as the

autonomous consumption)

So,the MPS falls to .05,⸫MPC=1-0.05=0.95

⸫theMultiplier=1/MPS=1/0.05=20

Consequently, the following changes occur:

If all to10G
falls to
100NX falls
to 10t=0.25

We know, Y will be the same as in part

I,Y=$2200C=Autonomous consumption is $50
New Consumption function=50+0.95Y

In determining the required change in part II, the non-income tax multiplier
isused.Becausethetransfer payment(TR)islikenegative tax.

BecauseofCOVID19situation,theeconomy is suffering from a recession ary gap due

to insufficient aggregate demand, so we use that multiplier function todetermine
how much government spending should be increased to return theeconomyto
potentialGDPwherefullemploymentoccurs.
 iv) Draw a graph to show the appropriate changes between part i) and part ii).

In the following diagram,income is represented by X-axis, and expenditure is represented

byY-axis. The line Y=E represents the equality of income and expenditure ( 45⁰). Here E0
isthe initialexpenditureline.The equilibrium is achieved at the intersection point of the
E0andY=Eline and the equilibrium income is 2200 which is found in part I. Because of the
Covid 19situation, TR has expenditure line becomes E1 with all changes including
TR=492.63.ThisE1 line intersects to the line of equality at point E to ensure the same level
of equilibriumoutput.
v) Give an example related to current Bangladeshi situation where
thegovernmentmayfollowa'TransferPromotingPolicy'insteadofa'GrowthPr
omotingPolicy'indetermining whogetsthetransferpayment.

Answer:

Because ofCOVID 19 situation, the economy of Bangladesh suffers a lot. The

financialexercises are at a stop contorting the basic market equilibrium. The
demand forgoods has decreased, as a result, the supply of goods is very
low.During this lockdown situation, the production of goods is almost stopped.
Not only that,many people lost their job and the public demand for goods are also
decreased. Govt. offer pronodona to the big garments industry sector. As a result,
rich people will become richer. BangladeshGovernment is trying to make the
situation better means trying to develop theeconomyfor underprivilegedpeople.

The role of growth-promoting policies plays in shaping the vulnerability and

resilience of an
economy.Butduringthissituation,thepolicywillnotbeeffectiveasmoneyis
notcirculating in
theeconomy.To,overcomethesituationgovernmentcantrytoreframetheeconomy's
overall sector. In that perspective govt. may need to liberal with both small to
large organization so that every sector people may get befitted from the
pronodona. There is a fundamental lack of demand due to overvalued exchange
rate andtightmonetarypolicy.Therefore,economicdevelopmentmayrequiredemand-
side policies whichboostaggregatedemand..

Considering the situation and to maintain a stable economic climate of

lowinflation and positive economic growth transfer promoting policy may play a
greatrole byincreasing the tax rate for rich people and the government can
distribute thatmoney to theeconomy.
 vi) Instead of paying transfer (TR) if the government were to
increasegovernmentspending(G),whattypeofcrowdingoutwouldyouexpect?
Brieflyexplain

Answer:

Instead of paying transfer payment (TR) if the government were to

increasegovernmentspending (G)then thistype ofcrowdingoutwouldhappen
→

WhenGovernmentExpenditure(G)↑→EconomyIncome↑→MoneyDema
nd↑ → Rate of Interest ↑→ Investment ↓ .

The above equation found that when Govt. expenditure increases the demand for
money increases, as a result, the interest increase. Because of mass govt.
expenditure the banks liquid capacity decrease and because of high-interest rate the
investment rate on private sector also getting decrease. A higher magnitude of
crowding out may lead to a lesser income in the economy.

vii) As we have observed recently that, a lot of the assistance from

thegovernmentisbeingmisappropriatedbydishonestindividualsandasaresultis
notreachingthetargetpopulation.Whatrolecanproperinstitutionplaytorectifys
uch mishandlingof government funds? Explain

Answer:

A lot of the assistance from the government is being misappropriated by

dishonestindividuals and as a result, is not reaching the target population. For
their dishonestly millions of takas already transferred others country in an illegal
way. Whether Bangladesh govt. failed to do that what they expected to do that.
In that case govt. must need to be strict regarding transparency and other issues.
And if anyone is found in corruption they will be discharges instantly. If govt.
imposed all those laws during illegal money transferring time people are more
aware and concern about the after facts. That means this restructure the
framework when the country able to implement the risk will minimize. In that
case, the Govt. may higher an assistance from the local or international non-
profit organization which ethical values are stronger in a sense that that person
works and report neutrally instead of partiality.