Final-Term Exam (Take-Home) Spring – 2021

Department of Business Administration

Subject: Macroeconomics Submission Day:

Instructor: Mr. Yasin Turabi Submission Date:
Program: BBA Max. Marks: 40
Please follow the instructions carefully:
1. Write your answers in a Word file and upload the file before the due date on Blackboard.
2. Write your name and registration ID on the first page of your Word file.
3. Answer scripts can only be uploaded on Blackboard any time before its deadline.
4. To avoid any unforeseen problems, you are advised NOT to wait for the last hour to upload your answer
script.
5. Submission of answer copy(ies) will be considered acceptable through Blackboard only. Therefore, do
not submit your document through email or any other medium.
6. Use 12 pt. font size and Times New Roman font style along with 1-inch page margins.
7. Follow the requirements of the word limit and the marking criteria while writing your answers.
8. Provide relevant, original and conceptual answers, as this exam aims to test your ability to examine,
explain, modify or develop concepts discussed in class.
9. Do not copy answers from the internet or other sources. The plagiarism of your answers may be checked
through Turnitin.
10. Recheck your answers before the submission on BlackBoard to correct any content or language related
errors.
11. Double check your word file before uploading it on BlackBoard to ensure that you have uploaded the
correct file with your answers.
NAME : ABDUL MUSSAVIR HASSAN RIND

REG NO : 12718

COURSE : MACRO ECONOMICS

INSTRUCTOR : SIR YASEEN RAZA TUARBI

FINAL PAPER
Q-1 Draw the impact on the AS/AD model for each scenario below. Determine the impact on Real GDP,
price level, unemployment, and the business cycle. First fill the table and then explain each scenario in few
lines. (14 Marks)

Use the following terminologies:

1) Real GDP: Increase or decrease

2) Price Level: Increase or decrease

3) Unemployment: Increase or decrease

4) Business Cycle: Expansion or Contraction

Use the following lines to show shifting in AD or AS, just drag it to right place and then compare the new
equilibrium with the previous one.

TABLE:Just insert the arrows and lines to fill this table.

Real Price Unemploy Business

Scenario Graph It! GDP Level ment Cycle
   
1. Ministry of
Finance
passes a tax
cut for the
middle class
and the P.M
Imran Khan
signs it.
      
2. Imports into
the Pakistan
begin to
decline while
exports out
of the
Pakistan rise.
        

3. Productions
costs rise
significantly
in many
sectors of the
economy.
      

4. FBR raises
taxes on
corporations.

  
5. People feel
confident
(Tabdeli)
about the
future of the
economy
(Consumer
confidence).

“Explanations”
Scenarios Explanations (60 words max. for each)
Tax cuts lead to an increase in disposable income. Higher
income leads to higher demand for home goods and
services thus increasing spending. Consumption costs are
part of the combined needs and therefore the combined
1. Ministry of Finance passes a tax cut rate collection and the AD curve to the right. We have
for the middle class and the P.M risen in price, an increase in real GDP.High productivity
Imran Khan signs it. of goods and services leads to high demand for workers
thus reducing unemployment. The period of economic
growth therefore reflects the increase in the business
cycle.

2. Imports into the Pakistan begin to High throughput and low import means an increase in
decline while exports out of the offline transmission. Complete sales are part of the
Pakistan rise. combined demand so the combined demand increases
and the AD curve shifts to the right. We have risen in
price, an increase in real GDP. High production of goods
and services in export exports leads to higher demand for
workers thus reducing unemployment. The period of
economic growth therefore reflects the increase in the
business cycle.
 Higher production costs lead to the left shift of the
combined integrated supply, with firms now offering
each level of value at a higher price due to higher
production costs. So the rest of the integrated delivery
3. Productions costs rise significantly shifts are left. We are down from real GDP as demand
in many sectors of the economy. for goods is low at high prices. We've raised prices.
Decreased GDP, means lower production of goods and
services that promote increased unemployment. The
economy reflects the declining business cycle.

Higher taxes on corporations lead to lower corporate

4. FBR raises taxes on corporations.
profits. Firms therefore reduce investment costs and as
investment costs are part of the combined demand and
thus the accumulation of the rise rate and the shift of the
AD curve to the left. We have declined in price, falling in
real GDP. A decrease in real GDP means a decrease in
the production of goods and services that leads to a
reduction in the demand for labor and thus increase
unemployment. The period of economic growth therefore
marks the cutting point of the business cycle.

High self-esteem leads to increased consumer spending

and business investment costs. Expenditure and capital
expenditure are part of the combined need and therefore
5. People feel confident (Tabdeli) the combined rate measurement and the AD curve to the
about the future of the economy right. We have risen in price, an increase in real GDP.
(Consumer confidence). Real GDP increase means higher production of goods
and services leading to higher labor demands thus
reducing unemployment. The period of economic growth
therefore reflects the increase in the business cycle.

(07 Marks)

Q-2. (a). I deposited Rs. 3 million of my money in a Habib Bank Limited, State Bank of Pakistan:
Required rate of reserve ratio (RRR): Weekly Average Demand Liability was set as 10.0 % in June 2020.
You are required to calculate the change in the money supply in the economy. If RRR decreased to 5% in
August 2020, what will happen with the same deposit of Rs. 3 million? You are also required to compare
and discuss it in few lines.(100 words)

ANSWER NO 2 (A)
 If we compare the change in funding with the change in the RRR, we will conclude that there is a negative
relationship between the RRR and the funding. If the RRR is reduced, there will be an increase in funding
and cashback. And if the RRR goes up, there will be a decrease in the supply and repetition.

EEXPLANATION

When RRR = 10%; Switch to cash offer = Deposits * Cashback

Here Cash Multiplication = 1 / RRR

Money Multiplication = 1 / 0.1 = 10

With a multiplication of 10 coins, change in the distribution = 3 * 10 = 30 million

With a decrease in RRR by 5%;

Multiplication = 1 / 0.05 = 20

With 20 times the amount multiplied, change in cash supply = 3 * 20 = 60 million

Q-2. (b). The labor force in Pakistan is 15,000,000 and the number of employed is 12,000,000. Calculate
the number of unemployed and the unemployment rate. Also discuss it in few lines by comparing it with
NRU (natural rate of unemployment 5%). (100 words)

ANSWER NO 2 (B)

Labor force = 15,000,000

No of employed = 12,000,000

Unemployed people = labor force – no of employed

15,000,000-12,000,000

3000,000

Unemployed rate = unemployed people /labor force × 100

3000,000/15,000,000×100

Unemployment rate = 20%

The natural unemployment rate of 5% means that the difficulty when the economy produces a full employment
result. In this case the rate is 20%. We need to reduce this rate by using service delivery policies such as better
education and training and a better life to reduce this rate by 20% to 5%

Q-3. (a) “Inflation is always and everywhere a monetary phenomenon”. Provide an economic explanation
for that statement. Is the statement more likely to be true in the long run, in the short-run, or in both? Explain.
(200 words)

ANSWER NO 3 (A)

Inflation is always and everywhere is a state of inflation in the sense that and can only be done by a faster rise
in inflation rather than output. The claim that inflation is a monetary factor is based on the perception of
inflation, in terms of inflation which varies according to the amount offered. This relationship is based on
mathematical difficulties, depending on the amount of jobs created in the economy equal to the amount of
money circulating in that economy. Assuming that the pace of inflation is stable, in an economy without
economic growth the rate of inflation is equal to the rate of inflation. Therefore, if the supply of goods
increases, there will be more money to chase the same goods, so prices will go up. Similarly, if the growth rate
of economic activity and monetary value are similar, prices should remain constant. This relationship is strong
and stable in the long run however, the relationship between the two variables may be temporarily weakened in
the short term due to factors such as price volatility and volatile financial frequencies. For example, a reduction
in the speed of money in broadcasting could be accompanied by an increase in revenue without putting pressure
on prices

(b) Suppose that the central bank announces a new quantitative easing program for the future, where money
supply will be permanently increased. What should happen to the price level today as a result of that
announcement? Explain. (200 words)

If the big banks raise money, it could cause inflation. The worst situation for a central bank is that its inflation
strategy could create inflation without targeted economic growth. An economic situation where there is
inflation, but no economic growth. Although most central banks are run by the governments of their countries
and have oversight, they cannot force banks in their country to increase their lending activities. Similarly, major
banks are unable to force borrowers to seek out loans and invest. If increased expenditures made by a number
of reductions do not work in a banking and economic way, the price reductions may not work .Another
potential negative impact on volume reduction is that it could devalue local currency. While discounts can help
domestic producers because exports are cheaper in the world market , falling inflation makes importing more
expensive. This can increase production costs and consumer prices
 (09 Marks)
Q-4 (a) Two different consumption functions:
 Consumption function I: C = 10 + 0.8Y
 Consumption function II: C = 10 + 0.7Y.
In which case is the multiplier larger? Show your working as well.

The multiplier is given the expression 1 / (1-MPC)

For the first use function, MPC = 0.8, so the repeater is 1 / 0.2 = 5

The second is 1 / 0.3 = 3.33.

So the multiplication is greater at C = 10 + 0.8Y

(b)Assume a simple closed economy, with an MPC equal to 0.75. The government has passed a balanced
budget amendment. The economy goes into a recession, so the government increases government spending by
40 million to try to expand the economy. Calculate the change in output (∆Y) from the increase in government
spending (∆G).
ANSWER NO 4 (B)
the income/spending multiplier = 1/(1-0.75) = 4
∆Y = mult × ∆G
∆Y = 4 × 40 million
∆Y = 160 million

(c) When Ali has no income, he spends $500. If his income increases to $2000, he spends $1900. What is his
consumption function?

Ali's expenditure is estimated at $ 500.

His side power is 1900/2000 = 0.95.

Ali's usage value is C = 500 + 0.5Y