PirMehr Ali Shah

Arid Agriculture University, Rawalpindi

Office of the controller of Examinations
Mid Term Exam (Theory)/ Fall 2020 (Paper Duration 24 hours)
To be filled by Teacher

Course No.: MGT-472 Course Title: Macroeconomics

Total Marks:100 (To be converted to 18) Date of Exam: 11/12/2020
Degree: BBA Semester: 3 Section: A, B, C, Afternoon
Marks
Q.No. 1 2 3 4 5 6 7 8 9 10 Obtained/
Total Marks
Marks
Obtaine
d
Total Marks in Words:
Name of the teacher:
Who taught the course: Dr. Farida Faisal Signature of teacher / Examiner:

To be filled by Student

Registration No.: 19-ARID-4111 Name: NADIA ALI

Instructions: Attempt all 5 questions. Total marks are 100. All Questions should be solved in
word expect diagram. Please insert diagram in proper format. Answers should be in your own
words. Definitions should be given within quotation marks with source reference. Similar or
copy/paste answers will not get any marks.

Q.1

I. Explain 5Es of macroeconomics.

II. Explain how COVID-19 pandemic has impacted each of these 5Es in all
countries of the world generally and Pakistan in particular.
(5+15)

Answer 1
Q.2

I. Write about three linked models of macroeconomics.

II. Provide statistics from Pakistan to explain this model.

(5+15)

Answer 2
Q.3

I. Explain the following identity:

C + G + I + NX ≡ Y ≡ YD + (TA − TR) ≡ C + S + (TA − TR)
II. How can the above identity be used to measure GNP/GNI of a country?
III. What are the disadvantages of using the above identity to measure economic
development in a country?
(5+5+10)

Answer 3

(PART-2)
Gross National Income:
 Gross national income is the estimation of all income (additionally called yield or national
yield) produced by a country's residents (the two citizens and foreign residents) within its
geographical outskirts, in addition to net receipts of income (wages, salary, and property
income) from abroad. So, GNI is a measure of all money, goods, services, and investments
that come into or stay in the country.

 One caveat when these goods and services are tallied up is that only "final goods" are
counted. This avoids twofold counting items.
 For instance, the estimation of a watermelon from the homestead may be $1, at that point
$5 at the grocery store. In this example, the watermelon's "final good" esteem is $5, and so
the complete estimation of the good would be counted in the country's income as $5.

Step by step instructions to Calculate Gross National Income

To calculate GNI for a country, include the following:

 Consumption (C).
Consumption (or personal consumption expenditure) is the estimation, everything being
equal, and services acquired and consumed by the country's family units.

 Investment (I).
This is any domestic capital spending by a country's citizen-run businesses.

 Government spending (G).

‘’Consumption and investments made by the government’’. Government spending doesn't
include any exchange payments (such as social security paid to citizens), since they are not
actually government spending, yet an exchange of money.

 Net exports (X).

This is the country's exports minus the country's imports. In request for this number to
increase NNI, a country needs to export more than it imports.

 Net foreign factor income (NFFI).

This is income that the country's citizens acquire abroad minus the income that foreign
residents procure in the country and convey of the country.
FORMULA
The equation for calculating GNI is frequently spoken to as: GNI = C + I + G + X + NFFI

(PART-3)
1. Economic Versus Social Values:
  National income and product figures measure the economic rather than the social
estimation of production as far as market prices of the different types of goods and
services.

 Yet, such prices of goods and services may not truly reflect the incentive to the society
of the goods and services in a more central—philosophical sense.

 A society, for example, may spend identical sums on wellbeing and tobacco, yet one
would hesitate to say that the social, as distinguished from the economic, estimation of
these two types of expenditures is the equivalent.

 The basic issue with social estimation of the national output is that it is a subjective
issue, depending on individual judgments concerning what ought to be. There is,
therefore, no simple or direct basis for the measurement of the social estimation of the
national output. Nevertheless, the distinction between the two is important.

2. Economic Versus Social Costs:

 A similar difficulty arises regarding economic and social costs because there is no
identity between the economic costs of producing the current national output and the
social costs of the output. Economic costs include:
o items like factor costs
o indirect business taxes
o capital consumption allowance etc.
for which some sort of monetary worth is possible. Social costs, then again, identify
with subjective and intangible wonders such as the general deterioration of the
physical, characteristic and social environments because of current production.

 For example, the beauty of the country-side may be destroyed beyond repair, as has
often occurred in mining and industrial areas, rivers and the climate may get
contaminated during the disposal of regular wastes, disease and crimes may increase. It
is difficult to measure these costs on account of their subjective nature and additionally
to know their magnitude. Still, it is impractical to deny their influence.

3. Distribution of National Output:

 National income accounts as readied currently don't reveal to us how the all-out
output is distributed amongst the different sections and citizenry. It shows the
distribution of income in various structures like wages, interest, rents, profits etc. in
any case, it doesn't show the distribution of income to people.
 A few economists who feel that greater equality in the distribution of national income
is to be liked to less equality give part of importance to these components in
measuring the society's government assistance.

4. Income and Output per Capita:

 Again, it is necessary to consider the changes in population as well as changes in

genuine output if meaningful comparisons of economic government assistance are
to be made every time. A rise in genuine income will not bring an improvement in
the material degree of prosperity if population grows at a faster rate than the
complete output.
 It is, therefore, desirable that for many purposes the correct information of national
income and output be reduced to a for every capita basis before comparisons are
made.
 5. The Value of Leisure:

 In any analysis of economic, government assistance the account of leisure time at

the individuals' disposal positions high in importance, yet the national income and
product accounts don't measure directly the estimation of leisure to society. During
the last 50 years the length of standard work week has tumbled from 70 hours every
week to under 48 hours per week—an advancement that shows a considerable
improvement in government assistance. What it implies, to a limited extent, is that
individuals are eager to exchange less goods and services for more leisure.

 There is no simple compromise involved between these. In any case, the fact is that
the productivity of work—what an average laborer can produce per unit of time—
has gone up, so it is possible to work less and yet enjoy the equivalent or much
larger heap of goods and services. It is in this feeling that GNP figures don't—they
cannot—measure directly the estimation of leisure to society.

6. Qualitative Changes in the National Output:

 Qualitative changes in the national output produced by changes in prices of goods

and services should be dealt with, if comparisons were to be made of the national
output at different points in time.
 As such, in the current stage of advancement of national income accounting, no
satisfactory techniques exist for taking into account qualitative changes in the income
and product sums.

7. The Composition of Output:

 The various aggregates of the national income accounting don't reveal to us much
about the composition of national output except in expansive terms of consumption,
investment, government expenditure etc.
 The government assistance considerations cannot be correctly known without some
knowledge of the composition of output, for example, the genuine GNP during war
time may show an increase, this increase doesn't speak to necessarily an increase in
the prosperity of the individuals.

Q.4
 I. Explain the aggregate demand curve. If we consider CPEC as an autonomous
investment, use the aggregate demand curve to explain why CPEC is crucial for
economic growth in Pakistan.
II. Explain aggregate supply curve. Use the aggregate supply curve to explain the
policies which government of Pakistan should adopt to increase Real GDP.
(10+10)

Answer 4
Aggregate Demand:
Aggregate demand is an economic estimation of the aggregate sum of demand for every single
completed goods and services delivered in an economy. Aggregate demand is expressed as the
aggregate sum of money exchanged for those goods and services at a particular price level and point
as expected.
 Aggregate demand is an economic proportion of the aggregate sum of demand for every
completed Goods and services created in an economy.
 Aggregate demand is expressed as the aggregate sum of money spent on those goods and
services at a particular price level and point as expected.
 Aggregate demand comprises of all consumer goods, capital goods (industrial facilities and
hardware), exports, imports, and government spending.

Aggregate Demand Curve

 If you somehow managed to speak to aggregate demand graphically, the aggregate measure
of goods and services demanded is spoken to on the horizontal X-axis, and the general price
level of the whole container of goods and services is spoken to on the vertical Y-axis.
 The aggregate demand curve, as most typical demand curves, slopes descending from left to
right. Demand increments or diminishes along the curve as costs for goods and services
either increment or lessening. Likewise, the curve can shift because of changes in the money
supply, or increments and diminishes in tax rates.

Ascertaining Aggregate Demand

The condition for aggregate demand adds the measure of consumer spending, private investment,
government spending, and the net of exports and imports. The recipe is appeared as follows:

Aggregate Demand=C + I + G + Nx
where:

 C=Consumer spending on goods and services

 I=Private investment and corporate spending on non-last capital goods (processing plants,
hardware, and so forth)

 G=Government spending on open goods and social

 services (framework, Medicare, and so on)

 Nx=Net exports (exports short imports)

Components That Can Affect Aggregate Demand

Coming up next are a portion of the key economic variables that can influence the aggregate
demand in an economy.

 Changes in Interest Rates

Regardless of whether financing costs are rising or falling will influence choices made by consumers
and organizations. Lower loan fees will bring down the acquiring costs for first-class things, for
example, apparatuses, vehicles, and homes. Likewise, organizations will have the option to acquire
at lower rates, which will in general prompt capital spending increments.

Conversely, higher loan fees increment the expense of obtaining for consumers and organizations.
Subsequently, burning through will in general decrease or develop at a slower movement,
contingent upon the extent of the expansion in rates.

 Pay and Wealth

As family unit abundance builds, aggregate demand usually increments also. Conversely, a decrease
in abundance usually prompts lower aggregate demand. Expansions in close to home investment
funds will likewise prompt less demand for goods, which will in general happen during downturns. At
the point when consumers are liking the economy, they will in general spend additionally prompting
a decrease in reserve funds.

 Changes in Inflation Expectations

Consumers who feel that swelling will increment or costs will rise, will in general make buys now,
which prompts rising aggregate demand. In any case, if consumers accept costs will fall later on,
aggregate demand will in general fall too.

 Currency Exchange Rate Changes

In the event that the estimation of the Pakistani rupees falls (or rises), unfamiliar goods will turn out
to be more (or more affordable). In the interim, goods fabricated in the Pakistan will get less
expensive (or more expensive) for unfamiliar business sectors. Aggregate demand will, along these
lines, increment (or lessening).

Reasons why CPEC is crucial for Pakistan’s economic growth

 Lift to Economy:
The CPEC will show a significant expansion in Pakistan's economy by expanding exchange with China,
Central Asia, Russia, Middle East and Europe. Indeed, even inside the development stage and finish
of the CPEC there will be a noticeable economic development in Pakistan by around 3 percent in
view of expansion in mechanical advancement because of the availability of assets.

 Expansion in Price of Land:

Between the development period of the CPEC and after the fruition of CPEC course the estimation of
the land encompassing is improving significantly and is giving many business occasions to proprietors
and designers of the land.

 Rural Growth:

Because of expansion in the agrarian creation Pakistan will notice a huge farming development with
collaboration of China and sharing present day technology and procedures alongside our practical
climate conditions.

 Expansion in Foreign Investment:

CPEC will advance unfamiliar investment in Pakistan, which will ultimately show increment in our
economic development rate.

 Expansion in Import and Export:

Another significant bit of leeway would be expansion in the exchange from which income will be
produced, which will be procured from traveling goods to and from different nations.

 Employment Opportunities:

CPEC would make employment open doors for the neighborhood individuals to an extent of around
a few million which will contribute a great deal to economical state of the Pakistan.

 Expansion in Tourism:

The CPEC would accommodate ideal the travel industry conditions in Pakistan, encouraging the
prospering of the travel industry and inn industry of Pakistan by giving a protected course and
alluring business activity around Gwadar city.

 Upgrade Pakistan's International Stature:

Many provincial and extra-territorial nations will join CPEC; this will improve Pakistan's worldwide
height, our contacts and will make an atmosphere of harmony and stability in the locale.

 Improve Relationship with different Countries:

We can ensured expect that South Asian nations will likewise favor CPEC lead geo-economics over
international relations and settling significant debates like Jammu and Kashmir will get simpler and
harmony will be accomplished successfully. This would likewise encourage South Asia's
interconnectivity and its connectivity with China, Central Asia, West Asia and Russia.

 Fortify Pak-China Bond:

The connection between Pakistan-China will be additionally fortified and will help improve Pakistan's
safeguard capacities. Pakistan-China's guard arrangements will increment and having stakes in
Pakistan' security and stability, China will be remaining with Pakistan in grieved times.
  Expansion in Stability:

Significant nations like Russia and some European forces will need to build up their associations with
Pakistan and play their part in contributing towards harmony and stability in South Asia thus further
improving the stability in the locale.

 Reinforce Defense:

Pakistan will get an opportunity to import Defense technology from Western nations and Russia to
reinforce its protection.

CPEC will definitely carry tremendous key and economic focal points to Pakistan and areas
encompassing it. Not exclusively will CPEC will be helpful for the country however the resident of
Pakistan will likewise have the option to shoulder products of its improvement on individual level.
To increment economic development

(PART-B)
Aggregate supply
Aggregate supply, otherwise called all out yield, is the complete supply of goods and services
delivered inside an economy at a given by and large cost in a given period. It is spoken to by the
aggregate supply curve, which depicts the connection between price levels and the quantity of yield
that organizations are eager to give. Typically, there is a positive connection between aggregate
supply and the price level.

 Aggregate supply is usually determined longer than a year since changes in supply will in
general slack changes in demand.

 Complete goods delivered at a particular price point for a specific period are aggregate
supply.

 Transient changes in aggregate supply are affected most significantly by increments or

diminishes in demand.

 Long run changes in aggregate supply are affected most significantly by new technology or
different changes in an industry.

Aggregate Supply (AS) Curve

 The aggregate supply curve portrays the quantity of genuine GDP that is provided by the
economy at various price levels. The thinking used to develop the aggregate supply curve
contrasts from the thinking used to build the supply curves for singular goods and services.
The supply curve for an individual decent is drawn under the supposition that information
costs stay steady.
 As the cost of good X ascents, dealers per unit expenses of giving great X don't change, thus
merchants are eager to supply a greater amount of good X‐hence, the upward slope of the
supply curve for good X. The aggregate supply curve, in any case, is characterized as far as
the price level. Expansions in the cost level will expand the price that makers can get for
their items and in this way prompt more yield.

 Policies which government of Pakistan should adopt to increase Real GDP.

  Supply-side policies

The elective strategy for improving economic development is to utilize supply-side policies. These
endeavor to build productivity and efficiency of the economy.

Supply-side policies include:

 Lower Income Taxes.

It is contended lower income tax can help the motivating force to work and build work supply. It is
conceivable, on the off chance that income taxes were excessive, at that point slicing them may urge
individuals to work more. Be that as it may, this contention is frequently exaggerated. Diminishing
the essential pace of income tax from 23% to 22% would have a very negligible effect on work
supply. With a tax cut, there is both an income and replacement impact. The income impact
expresses that higher taxes make individuals work longer hours to accomplish their objective
income.

 Flexible work markets.

Highly controlled work markets, with excessive guideline, may deter firms from employing laborers
and setting up in any case. It is contended that nations, for example, France have an excessive
amount of work market limitations, for example, the expense of terminating laborers, maximum
working week and least wages. More flexible work markets would thus be able to give a drawn-out
lift to investment. Nonetheless, there is a compromise. More flexible work markets could expand
work insecurity and lead to destructive consequences for work productivity.

 Better Union relationships.

During the 1970s, the UK economy endured on account of poor mechanical relations. There were
successive strikes which halted creation. With an ill-disposed demeanor, it was hard to advance
more work effective creation measures. Lessening the intensity of exchanges unions can assist with
improving work productivity.

 Privatization and deregulation.

Privatizing enterprises can expand efficiency as private firms have a more noteworthy benefit
motivating force to reduce expenses and lift productivity.
Q.5

I. What does each point on the IS curve represent? What does each point on LM
curve represent? What does point of equilibrium in IS-LM model represent and
how is it related to it aggregate demand?
II. According to IS-LM framework what policy should be adopted by State Bank of
Pakistan to increase level of GDP/output. Give detailed explanation of your
answer.
(10+10)

Answer 5