North South University, Department of Economics, ECO104

FALL 2021 FINAL EXAMINATION , Marks: 40 Date: 13th January,2022

Time allowed: one hour 20 minutes. Faculty: Humaira Husain
Name:Md. Sazzad Hossain ID:2012791630 Sec: 15
Answer all following questions: Identify the correct answer (by highlighting with yellow color) (1 times
10 = 10 Marks)
Q1. In the Keynesian model of national income, In case of G m(by highlighting with yellow color)
ultiplier if △G = 3.55 Million BDT , MPC = 0.75
△Y =
a) 12 Million BDT
b) 10 Million BDT
c) 14.2 Million BDT
d) 2 Million BDT
Q2. In the Keynesian model of national income, The smaller the value of MPC
a) The smaller the value of G multiplier c) The larger the value of G multiplier
b) The value of G multiplier is unaffected d) Value of G multiplier may increase or decrease
Q3. In the Keynesian model of national income, The sign of ‘tax’ multiplier is negative because
a) Increase in equilibrium income is related to decrease in tax collection
b) Increase in equilibrium income is related to increase in tax collection
c) Increase in equilibrium income is not related to reduction in tax collection
d) Increase in equilibrium income is associated with increase in government purchase
Q4. In self the regulating economy if the current output is smaller than natural level of output
a) Current unemployment rate = natural unemployment rate
b) Current unemployment rate > natural unemployment rate
c) Current unemployment rate < natural unemployment rate
d) Current unemployment rate may greater than natural unemployment rate
Q5. In Keynesian model of national income If MPC value rises the planned expenditure line becomes
a) Flatter
b) Steeper
c) Neither steeper nor flatter
d) None of the above
Q6. In case of fractional reserve banking system
a) Commercial Banks are indifferent to play roles in money creation
b) Commercial Banks do not contribute to money creation
c) Commercial Banks contribute to play roles in money creation
d) Commercial Banks do not have ability to play roles in money creation
Q7. In the model of money supply, if the money multiplier is constant, there is
a) Directly proportional relationship between money supply and monetary base
b) No relationship between liquidity preference of the public and money supply
c) Relationship between reserve requirement ratio and monetary base
d) Inversely proportional relationship between reserve requirement ratio & liquidity preference of
the public
Q8. In Neoclassical growth theory,
a) Capital deepening expedites economic growth
b) Technological upgradation promotes economic growth
c) Good governance promotes growth
d) Sound property right structure intensifies economic growth
Q9. In new growth theory
a) Skilled labour enhances economic growth
b) Research and development promote economic growth within economic system
c) Physical capital expedites growth process
d) Property right structure promotes growth within economic system.
Q10. If the base money is constant, greater the value of money multiplier
a) Greater the amount of money supply
b) Smaller the amount of money supply
c) Amount of money supply is unaffected
d) Amount of money supply may be affected
Q11. Answer any five of following questions (Add Picture in your answer if needed) (5 times 6= 30
Marks) (Maintain the order please) Do NOT elaborate your answer unnecessarily. To answer all
questions, USE at best 10 to 11 sentences.
a) Derive the expression for tax multiplier in Keynesian model. If the value of tax multiplier = -2.55
How do you interpret this?
b) Develop the following model of money supply: Money supply = Money multiplier × Monetary
Base. If Base money = 5 million BDT and reserve requirement ratio = 10% and currency deposit
ratio = 15%, calculate Money supply of the economy.
c) Explain the following two cases of self- regulating economy: Inflationary gap and recessionary
gap. Discuss the Govt policy implication for each case.
d) What are basic differences between neoclassical growth theory and New growth theory?
e) How does adjustment in inventory investment by firm help reach equilibrium output in Keynesian
Model.
f) Discuss briefly the sources of economic growth.

Thank you.
 Answer to the question No: 11(b)

Money supply (M) = Currency (C) + Demand Deposit (D)………………. (i)

Monetary Base (B) = Currency (C) + Reserve (R)………………….. (ii)
Dividing Equation (i) By Equation (ii) we have,

Dividing both the numerator & denominator on right hand side by D, we get:

……………….(iii)

From equation (iii) we can say, Money Supply = Money multiplier × Monetary Base.

So, Money multiplier =

Given that,
Monetary Base (B) = 5 million BDT
Reserved Requirement ratio (rr)= 10% = 0.10
Currency Deposit Ratio (cr) = 15% = 0.15
We know,

Monetary Base = = = = 4.6

Here, the value of mm>1

Money Supply M= Money Multiplier × Monetary Base
= 4.6 × 5 million BDT
 = 23 million BDT
Therefore, the total money supply is 23 million BDT.

Answer to the question No: 11(C)

Inflationary gap is a situation where we can see that the unemployment rate is less than the

natural unemployment rate. Shortage in labor market that means the labor demand will be

higher and the entrepreneurs will look for more laborers to recruit in their firms. And the

worker will also take this chance, and they will increase their nominal wages. As a result of that

the SRAS curve shifts to left and economy moves into long run equilibrium.

O YN Y1 O YN Y1

Recessionary Gap: Recessionary Gap is the situation when the economy is currently producing

a level of Real GDP in the short run and that is smaller than its natural real GDP level. The

unemployment rate is greater than the natural unemployment rate.

Here unemployment rate is greater than the natural unemployment rate so there will be

surplus in the labor market. The wages fall and SRAS curve shift to the right. Economy moves

into long run equilibrium.

O Y2 YN O Y2 YN

Answer to the question No: 11(D)

Neoclassical growth: Neoclassical growth theory is an economic theory that describes how a consistent

economic growth rate is achieved by the interaction of three driving forces: labor, capital, and

technology. The basic equation for neoclassical growth theory is, Y/L = f (K/L) = f (k). This growth theory

developed by Robert Solow dominated the literature in 60’s and 70’s.

Growth Theory: During the early 1980s, a group of economists led by Paul Romer proposed the New

Growth/Endogenous Growth Theory as an alternative growth theory. The new growth theory proposed

that technological progress is determined by and driven by research and development (R&D) activities

within the economic system..

Some of the basic differences between neoclassical growth theory and new growth theory are given

below-

 Neoclassical models take external factors into account to anticipate economic growth. New

growth theory, on the other hand, considers internal factors when forecasting economic

growth.

 Neoclassical growth theory emphasizes two resources: labor and capital whereas new growth

theory emphasizes the process of discovering and formulating ideas.

 Capital deepening is emphasized in neoclassical growth theory which means providing more

capital (physical) per unit of labor or labor hour. New growth theory, on the other hand,

emphasizes technological advancement.

 The neoclassical theory identifies the level of capital per worker and the effectiveness of labor in

order to generate permanent growth in the economy's per capita stock of labor. New growth,

on the other hand, only states that the factors of adequate human capital are present.

 In neoclassical growth theory, technology was said to be exogenous; that is, it came from

outside the economic system. However, in new growth theory, technological progress is

determined within the economic system and it is driven by Research and development (R&D)

activities.

 Neoclassical theory predicts only conditional convergence, which means that only two

economies have the same saving rates, production function, and rate of technological progress.

According to new growth theory, there will be no convergence dynamics that lead to a steady-

state production level.

 Answer to the question No: 11(E)

PE & AE
AE
Planned Drop A
in Inventory
PE
E
F B
Unplanned inventory
accumulation=AB=Positive Inventory
G investment. FG= Negative Inventory.

YE
Y (Income/GDP/Output)
O Y2 Y1

In this graph, we have Planned expenditure (PE) & Actual expenditure (AE) in the vertical axis

and in the horizontal axis we have income/GDP/output (Y). The 45˚ line is the graph of AE and

the upward slopping straight line is the graph of PE. We can see that AE and PE cross at point E.

So, the equilibrium level of income is 0YE and the Keynesian cross is at the point E.

When firms produce at level Y1, planned expenditure PE falls short of production, and

inventories accumulate. Firms reduce production as a result of the inventory accumulation.

Similarly, if firms are producing at level Y2, then planned expenditure PE exceeds production,

and firms run down their inventories. This fall in inventories induces firms to increase

production. Firm decisions drive the economy toward equilibrium in both cases.
 Answer to the question No 11(f)

There are the sources of economic growth:

1. Natural Resources: a nation rich in natural resources is likely to experience growth, ceteris

paribus. For example, if a place such as Hong Kong, which has few natural resources, had

been blessed with much fertile soil.

2. Labour: An increase in labor productivity tends to lead to an increase in per capita Real GDP.

How then do we achieve an increase in labor productivity? One way is through increased

education, training, and experience, which are called human capital. Another way is through

(physical) capital investment Measurement of labor productivity:

3. Average product of labor APL = Q/L .

4. Capital (Physical): There is a link between non consumption, or saving, and capital

formation. As the saving rate increases, capital formation increases and so does economic

growth. (Neoclassical growth)

INCENTIVES: (FOR FIRMS TO INCREASE INVESTMENT IN CAPITAL)

o Tax rate could be decreased (corporate profit tax)

o Interest rate that firm must pay to acquire physical capital should be declined

5. Technological Growth: Technological advances may be the result of new capital goods or of

new ways of producing goods. They can also come as a result of investing in research and

development (R&D), managers figuring out how to motivate workers to work to their

potential, or a new way of managing people.

Property rights are the range of laws, rules, regulations that define rights for the use and

transfer of resources. In one property rights structure, people are allowed to keep the full

monetary rewards of their labor; in the other, they can only keep half.