Answer all the given problems:
a) If you woke up in the working and found that nominal GDP has doubled overnight, what statistic would you require checking before you start to celebrate: Why?
b) Why do the economists use real GDP instead of nominal GDP to gauge economic well-being?
c) Describe critically GDP as a measure of the economic welfare.
problem 2: How each of the given events is likely to influence GDP?
a) Environmental laws prohibit the firms from emitting pollution.
b) Strikes by trade unions.
c) Discovery of new seed raises farm harvest.
problem 3: Siankanga, a farmer grows a bushel of wheat and sells it to a miller for K 1.00. The miller turns the wheat into flour and then sells the flour to a baker for K 3.00. The baker uses the flour to make bread and sells the bread to households for K 6.00. The households eat the bread. Find out the value added in each phases of production? What do you mean by GDP?
problem 4: Construct a model of loanable funds market in a closed economy.
a) Describe the effect of an increase in the Government Budget Deficit on the rate of interest and the level of private investment. Recognize the crowding out effect in this context.
b) Assume that investment is perfectly interest inelastic. Describe the crowding out effect for an increase in the govt. budget deficit.
c) If saving is perfectly inelastic then what will be the crowding out effect for a raise in the government budget deficit.
problem 5: Define the term velocity of money. Describe the role of velocity of money in the quantity theory of money.
b) ATM card raises the velocity of money; True or false. Validate.
problem 6: Describe the process of credit creation by the commercial banks. Describe in this context the statement that an individual bank has little capability to expand the money supply unless all the other banks expand in step’.
problem 7: The total value of loan in an economy is K400 million and the reserve ratio is 20 %. A raise of K15 million in the money which the public keeps in commercial banks altogether with a raise of the reserve ratio to 25 % will raise the total amount of loans by K50 million. True or false? Describe.
problem 8: By using Simple Keynesian Model, describe the effect of the given:
a) A raise in government expenses.
b) A reduction in lump sum taxes.
In this context compare the government expenditure multiplier with tax multiplier.
problem 9: Assume that the economy is characterized by the given structural equations:
C = 160 + 0.6 (4 –T)
I =150; G = 150; T = 100.
a) Find out the equilibrium output level.
b) If G increases to 200, what is the equilibrium level of output? Determine the value of the government expenditure multiplier?
c) If tax drops to 50, by how much will equilibrium output increase? Determine the value of tax multiplier?
problem 10: In mainstream economics, it is argued that firms invest more when interest rates drop as it lowers their cost of financing. Keynes, though, argues something a little different. He says, ‘A fall in the rate of interest stimulates the production of capital goods not because it reduces their costs of production however as it raises their demand price’. How is this so?