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# Solutions Q. Calculate the depreciation, given GNP at market price NNP at market price Exports Imports A.

GNPMP depreciation = NNPMP = 1931 1784 = 147 Q. In a two sector economy the consumption function is equal to 8 + 0.7Y and autonomous investment is equal to 22. Calculate the firm equilibrium level of income in the economy. At equilibrium: Y = C + A = 8 + 0.7Y + 22 Y 0.7Y = 30 .3Y = 30 Y = 100 Determine the aggregate demand function for the economy and the multiplier, given Saving function (S) = - 40 + 0.25 Yd Disposable income Tax function Investment Government expenditure Net exports (T) = (I) = (G) = (Yd) = 0.20Y 50 80 YT 1931 1784 345 563

A.

Q.

(X-M) = 60

A.

Yd = S + C

C = Yd S = Yd ( - 40 + 0.25Yd) = Yd + 40 - .25 Yd = 40 + .75Yd AD = C+G+I+NX = 40 +.75Yd + 80 + 50 + 60 = 230 + .75 (Y-.2Y) = 230 + .75(.8Y) =230 + .6 Y Multiplier = 1/ (1-.6) = 2.5 Q Disposable Income A B C D 24000 25000 26000 27000 Consumption expenditure 24200 25000 25800 26600 0.8 0.8 0.8 0.8 Marginal propensity to consume -200 0 200 400 0.2 0.2 0.2 0.2 Net saving Marginal propensity to save

E F G A MPC= C/

## Yd =(25000-24200)/(25000- 24000) = 800/1000 = 0.8

MPS = 1- MPC = 1-0.8 = 0.2 S1 = Yd1-C1 = 24000-24200 = -200 Q. Calculate GDP at market price, given: Direct taxes Indirect taxes Factor income paid to the rest of the world Factor income received from abroad Depreciation Surplus Subsidies National income 800 3,800 4,000 3,000 4,000 350 2,000 16,000

A. GDPmp = NNPfc + Dep NFIA + NIT = 16000 + 4000 (3000 4000) + (3800 2000) = 22800

Q. In country X nominal GNP was 1000 in the year 1981-82 which rose to 2000 in year 1991-92. Prices during the period increased 100%. Calculate the real GNP in the year 1991-92.

A. Year 1981- 82 1991-92 2x*y1 = 2000 Nominal 1000 2000 x*y1 = 1000 Price x 2x Real 1000 1000

x*y = 1000

Q. Given c = 0.8 and t = 0.25 calculate the change in income if the government expenditure has increased by 25.

## A. Multiplier = 1/(1-c(1-t)) = 1/(1-.8(1- .25)) = 2.5

Y= *A = 2.5* 25 = 62.5

## Q. The following set of relationship has been identified for an economy.

C = 200 + 0.6Y I = 50 G = 100 E = 50 M = 0.4Y Find the equilibrium level of income of the economy. Determine the multiplier.

## A. AD = C+ G+ I+ (E M) = 200 + .6Y + 100 + 50 + 50 - .4Y = 400 + .2Y

At equilibrium Y = 400 + .2Y .8Y = 400 Y= 500 Multiplier = 1/0.8 = 1.25

Q. An economy consists of production sector and household sector. The production sector is made up of three corporate Rose, Perfume and Bottle. Rose Company paid wages of Rs. 2250 to workers who gathered rose. It sold roses worth 1650 to Perfume company for which the later paid 1950. The rose company added the remainder of its output to its inventory. The perfume company paid Rs. 4.500 to its workers to convert the roses into perfume. It sold Rs 6,750 worth of perfume to bottle company for Rs. 7,200. To achieve this kind of sales the perfume company drew from its inventories. The bottle company paid Rs. 750 as wages. It increased its inventories by Rs. 225 and sold the rest of the perfume to households for Rs. 7,875. A. Set up an input output mapping showing transactions within productive sectors and households. Determine the value

## bottle company Payments 750 Revenue 225 7875

Value added = wages + profit = 2250 + 4500 + 750 + (1950 1650) + (7200 6750) + (7875 7200 -750 225) = 8400 Q. If investment expenditure increased by 50 and government expenditure increased by 40 calculate the effect on GNP given that C = 500, I = 100, G = 100, GNP of the economy is 800 and MPC = 2/3. A. I = 100 Increase = 50 G = 100 Increase = 40 Y = c A c = 1/(1-c) = 1/(1-2/3) =3 A = 50+40 = 90 GNP increases by 270 New GNP = 800+270 = 1070 Given the following calculate the net factor income from abroad C = 500 Y= 3*90 = 270 c = 2/3

Q.

(4)

1250

## 800 100 150 290 60

A. GNPmp = Consumption +( Net investment+ Depreciation)+ Government spending+ Net export+ NFIA
1250 = 800 + 100 + 150 + 290 + 60 + NFIA 1250 = 1400 + NFIA NFIA = 1400-1250 = 150

Q.

## GNP at market price

3,000 600 200 1,400 600 2,000 200 300 2,000 (6)

Gross investment Net investment Consumption Government purchase of goods and services National income Government budget surplus Transfer payment NDP at market price Calculate the following: (a) Net exports (b) Net indirect tax (c) Depreciation

## A. c) Gross investment- Net investment = Depreciation Depreciation= 600- 200 = 400

b) GNPmp-Dep =NNPmp = 3000-400=2600 NNPmp - Net indirect tax =NNPfc Net indirect tax = NNPmp NNPfc= 2600 2000 = 600 a) NNPmp- NDPmp = NFIA = NNPfc + NIT NDPmp = 2000+600 -2000 =600 GNPmp +NFIA = GDP mp = 3000 +600 = 3600 GDPmp = C+G+I+NX= 1400+600+600 +NX = 2600 NX = 3600 2600 = 1000 Q. Given M= 20, I = 20, G = 10, TR = 5, X = 10, TA = 0.2Y and savings = -8 + 0.15 Yd. Calculate the budget deficit at equilibrium.

A.

AD = C+G+I+(X-M)= (Y-S) +G+I+X-M = Y-(8+.15 Yd) +10+ 20+10-20= Y-8-.15(Y+TR TA)+ 20=Y-.15Y.15TR+.15TA+12 = Y-.15Y+.15*.2Y+12-.15*5= .82Y+11.25 At equilibrium TA = .2*62.5=12.5 Y=AD=.82Y+11.25 Y-.82Y = 11.25 .18Y = 11.25 Y= 11.25/.18 = 62.5

BD= G+TR-TA=10+5-12.5=2.5

Q. Compute personal disposable income, national income, and GDP at factor cost, given that GNP at market price 4,000 Personal income tax 600 Subsidies 350 Factor income received from abroad 1,000 Factor income paid abroad 800 Indirect taxes 600 Depreciation 400 A. GDPfc= GNPmp-NFIA-NIT= 4000-(1000-800)-(600-350) =3550 NNPfc =GNPmp-NIT-Dep = 4000-(600-350)-400=3350 PDI= NNPfc- Personal income tax= 3350-600= 2750 Q.

(6)

Let us assume that consumption at a particular period is 3,000 when the disposable income is 4,000 and rises to 3,900 when disposable income rises to 5,000. Calculate the marginal propensity to save.

A.

## Y=C =Y/C=(4000-5000)/(3000-3900)=1000/900=10/9=1/(1-c) MPS=1- MPC=1-c=0.9

1-c=1/(10/9)=9/10=0.9

Q. In an economy there are three industries A, B and C. A sells good worth Rs. 600 to B and goods worth Rs. 500 to C.
Consumers divide their expenditure equally between Bs goods and Cs goods. If the national product is Rs.1500 and if there are no other transactions than mentioned above, calculate the value added by industry B and C respectively. (4)

A.

A 600 500 C

H 750 750 C

(1500/2)

VAB=R-P=750-600=150 VAC=R-P=750-500=250

Q. The following relations and parameters are specified for a hypothetical economy.

(6)

Savings function Tax function Import Investment Government expenditure Transfer payments Exports (I) (T)

= -8 + 0.15 Yd

= 50

= 10 =5 = 10

## Calculate the budget deficit/surplus at equilibrium.

A.

BS=TA-G-TR=.2Y-10-5=.2Y-15

AD = C+G+I+X-M = (Y-S)+10+20+10-50 = Y-(-8+.15Yd)-10 = Y+8-.15(Y-TA+TR)-10 = Y-.15(Y-.2Y)-.15*TR-2= Y-.15(.8Y)-.15*5-2= -2.75+Y-.12Y=.88Y-2.75 At equilibrium Y=AD=.88Y-2.75 BS=.2Y-15=.2*23-15=4.6-15= -10.4 Y-.88Y=-2.75 .12Y= -2.75 Y= -2.75/.12=23

Q.

From the national accounts at current prices we have the following information 84686 -233 4957 1772 10689

(6)

NDP at market price Net factor income from abroad Depreciation Subsidies Indirect taxes Calculate the value of (a) NNP at market price (b) GNP at factor cost (c) GDP at market price

A.

NNPmp=NDPmp+NFIA=84686+(-233)= 84453

GNPfc= NNPmp-NIT+Dep=84453-(10689-1772)+4957=80493

GDPmp=NDPmp+Dep=84686+4957=89643

Q. In an economy the marginal propensity to save is 0.3 and the tax rate is 0.20. If the autonomous investment decreases
by 560 to what extent it will affect the consumption at equilibrium, given C = 60 (4)

A. c=1-s=1-.3=.7

g=1/(1-c(1-t))=1/(1-.7(1-.2))=1/.44=2.28

A=-560

## At equilibrium Y=gA =2.28(-560)=-1277

C= C+cY=60+.7(-1277)=-834

Q. In the economy of a country investment expenditure increased by 120 and the government expenditure is increased by
40%. Calculate the effect on GNP when the current GNP is 2,000, marginal propensity to save is 0.25 and Consumption Investment Government expenditure 1200 200 50 (4)

A. Y=gA
given

g= 1/[1-c(1-t)]=1/1-.75=1/.25=4 A=120+.4*50=120+20=140

## `New GNP = 2000+560=2560

Q. At a level of income of Rs. 20,000 the entire income is consumed. The MPC is 0.7.Calculate the autonomous
consumption amount. (4)

A.

C=C+cY

20000=C+.7*20000

C= 20000(1-.7)=6000

Q. In an economy the GDP at factor cost is Rs. 80,000; depreciation is Rs. 4,000; GNP at market prices Rs. 95,000 and indirect
taxes are Rs. 5000. There are no subsidies in the economy. Calculate the net factor income from abroad. (4)

A. GNPfc=GNPmp-NIT=95000-(5000-0)=90000

## NFIA=GNPfc -GDPfc =90000-80000=10000

Q. Disposable income is given by Yd and consumption C in the following table. Calculate the marginal propensity to consume
(MPC), given that C = 40 + bYd where b is the MPC (4)

S.No 1 2 3 4

A.

## b=(C-40)/Yd=(360-40)/400=320/400=.8 b=(400-40)/500=.72 b=(580-40)/600=.9 b=(670-40)/700=.9

Q.

The following saving and import function been estimated for an economy. S = - 50 + 0.25Y M = 0.10 Y Where S is aggregate savings, M is imports and Y is GDP. Derive the aggregate demand function. If the private investment increases by 200 and the Government expenditure decreases by 60 calculate the change in GDP for the given economy. (6)

A=I-G=200-60=140 Y=gA=2.9*140=406 c=1-s=1-.25=.75 g=1/(1-c(1-t)+m)=1/(1-.75(1-0)+.1)=1/(1-.75+.1)=1/.35=2.9

Q.

National income Government purchase Consumption Net investment Gross investment GNP at market price Government budget surplus Transfer payments Net factor payment from abroad Calculate net indirect taxes, net exports and subsidies.

## A. Dep= Gross investment- Net investment= 800-300=500

NNPmp=GNPmp-Dep=4800-500=4300

NIT=NNPmp- NNPfc=4300-3850=450

BS=TA-G-TR=TA-930-510=TA-1440 Sub=TA-NIT=1470-450=1020

TA=BS+1440=30+1440=1470

NIT=TA-sub

GDPmp=GNPmp-NFIA=4800-0=4800=C+G+I+X-M=3000+930+800+NX=4730+NX

NX=4800-4730=70

Q.The following relations are derived for a particular economy: (4) C = 500 + 0.7Yd I = 20 G = 200 TR = 50 E= 25 M= 30 TA = 0.133 Y The government would like to increase its expenditure to 250. If the government would at the same time, like to have a balanced budget, what should the tax rate be? A. Effect of an increase in government expenditure c=.7 t=.133 Y=gA=[1/(1-c(1-t)]50=[1/1-.7(1-.133)]50=1.43*50=71.5 For a balanced budget Expenditure=Revenue Expenditure=G+TR=200+50=250 Revenue=TA=tY 250=tY t=Y/250=71.5/250=.27 t=.133+.27=.42

t=Y/250

Q. During the year 1989 firm X paid Rs 60,000 as wages and salaries, Rs 10,000 as interest, Rs 8,000 as rent, Rs 2000 as
contribution to employees pension fund. The firm during this period received Rs 3,000 as interest and Rs 4,000 Rs as rent from other firms and also a subsidy of Rs 2,000 from the Government. Undistributed profit before tax was Rs 5,000. Estimate firm Xs net value added at factor cost for the year 1989.

A. X Payment = wages and salaries+ interest + rent + contribution to employees pension fund+ Undistributed profit =
60000+10000+8000+2000+5000=85000 X receipt= interest+ rent+ subsidy=3000+4000+2000=9000 X Value added =85000-9000=76000

R. From the following data calculate National Income a. Private final consumption expenditure
980

(6)

## b. Net domestic capital formation

c. Exports 90 120

160

f. Imports

## g. Government final consumption expenditure h. Indirect taxes i.

Net Compensation of employees received from rest of the world j) Net property and entrepreneurial income received from the rest of the world k) Subsidies 30 5

## A. NNPfc=GDPmp-NIT-Dep+NFIA=GDPmp-( Indirect taxes+ Subsidies)- Consumption of fixed capital+(receiptpayment)=GDPmp-(170-30)-120+5=GDPmp-255

GDPmp= +Private final consumption expenditure+gross domestic capital formation+ Government final consumption expenditure+(export-import)=980+(160+120)+130+(90-135)=1345

NNFfc=1345-255=1090

Q. When planned consumption equals 40 + 0.90 Yd and planned investment is 50 calculate the equilibrium level of income.

[Yd=Y]

At equilibrium Y=90+.9Y

.1Y=90

Y=900

Q. In an economy, the GDP at factor cost is 70,000, NNP at market price is 71,000, Depreciation is 2,000 and indirect taxes are 1,000. There are no subsidies. Calculate the net factor income from abroad. A. NNPmp+Dep-NIT-NFIA=GDPfc NFIA= NNPmp+Dep-NIT-GDPfc=71000+2000-1000-70000=2000

## Q. Calculate the value added by firm A B and C

Purchases of Raw material and services by Firm A:

(6)

From Firm B From Firm C Sales of material by Firm A: To firm B To Firm C Sale by Firm A: To Government To rest of the world To Households A.

10,000 20,000

5,000 7,000

## 12,000 3,000 13,000

Value added by A= Sales by A-Purchase by A=5000+7000+12000+3000+13000-10000-20000=10000 Value added by B= Sales by B-Purchase by B=10000-5000=5000 Value added by C= Sales by C-Purchase by C=20000-7000=13000

Q.

Calculate GNP and GDP at market price given (a) Net national product at factor cost (b) Consumption of fixed capital 56,000 500 3,000 1,000 -5,000

(4)

## (c) Net indirect taxes (d) Subsidies

(e) Net factor income paid abroad

A.

GNPmp=NNPfc+NIT+dep=56000+3000+500=59500 GDPmp=GNPmp-NFIA=59500-(-5000)=64500

Q. A.

In the economy the consumption level is 900 and the equilibrium level of income is 4500. If the saving in equilibrium is 1080, calculate the multiplier in the economy. (4) At equilibrium Y=C+S C=Y-S=4500-1080=3420 C=C+cY 3420=900+c4500 c=(3420-900)/4500=.56

Q.

## Given C = 40 +0.6Y in a two sector model find the equilibrium income.

(2)

A. At equilibrium Y=C

Y=40+.6Y

`.4Y=40 Y=100

Q.

Private Consumption expenditure Expenditure of non residents in domestic market Gross capital formation Wages and salaries paid to the rest of the world Net indirect tax Net capital formation Change in stocks Government Final consumption expenditure Interest and entrepreneurial income received from abroad Net export Calculate the GNP at factor cost.

4,000 1050 380 900 650 260 250 800 2000 400 (4)

A. GDPmp= Private Consumption expenditure- Expenditure of non residents in domestic market+ Gross capital formation+
Government Final consumption expenditure+ Net export=4000-1050+380+800+400=4530

GNPfc=GDPmp+NFIA-NIT=4530+( Interest and entrepreneurial income received from abroad- Wages and salaries paid to the rest of the world)-650=4530+2000-900-650=4980