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Thread: ECO403 Macroeconomics Assignment No.2 Solution Fall Semester 2013

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    18 ECO403 Macroeconomics Assignment No.2 Solution Fall Semester 2013

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    ECO403 Macroeconomics Assignment No.2 Solution Fall Semester 2013



    SEMESTER FALL 2012
    MACROECONOMICS (ECO403)
    ASSIGNMENT NO. 02
    DUE DATE: 31ST JANUARY 2013
    MARKS: 25
    ASSIGNMENT:
    The Case:
    Egypt is one of the most popular tourist destinations in the entire world and
    growing economy of Africa. The Egyptian economy depends on petroleum
    exports, media, textile and tourism. In 2008, more than 12.8 million tourists visited
    Egypt providing revenues of nearly 1 trillion rupees. As tourism industry is the
    major source of revenue for Egypt, suppose government of Egypt invested Rs. 7
    million on tourism to make it more attractive and comfortable for tourists. An
    overwhelming majority got benefit in the shape of employment, facilities and
    others. This temptation stimulated the other industries like cement, iron, chemical,
    tobacco, canned food, shoes and furniture. This boost not only changed the living
    standards but consumption, saving, inflation, employment, incomes aggregate
    demand were also improved. The consumption function for the people of Egypt
    before investment was C = 100 +0.70Y while it was C = 100 +0.75Y after the
    investment.
    The analytical view before and after the government investment is given below:
    Before investment After investment
    Income
    (Rupees)
    MPC MPS Real interest
    rate
    Income
    (Rupees)
    MPC MPS Real interest
    rate
    10000 0.70 0.30 5.5% 15000 0.75 0.25 5.7%
    This investment also increased the confidence of producers and consumers and
    changed the other vital facts and figure of the economy which are given below.
    Before investment After investment
    Growth rate Employment
    rate
    Inflation
    rate
    Growth
    rate
    Employment
    rate
    Inflation rate
    1.3% 5% 2.1% 2.99% 5.7% 2.5%
    According to above facts and figures, government investment has uplifted the
    other sectors of the economy.
    Requirements:
    Using the information given above, calculate:
    A. Consumption of the people of Egypt from the given equation after the
    investment
    B. Government spending multiplier before and after the investment
    C. Tax multiplier before and after the investment
    D. Nominal interest rate before and after the investment
    (Note: Write down all relevant steps involved in calculation)
    (Marks =7+6+6+6)
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    Idea Solution

    A. Consumption of the people of Egypt from the given equation after the investment

    Y = income

    C = 100 +0.75Y

    C = 11350

    B. Government spending multiplier before and after the investment

    Government Spending Multiplier = 1/MPS

    Before = 3.33

    After = 4

    C.Tax multiplier before and after the investment

    Tax multiplier = - MPC/MPS

    Before = 2.33

    After = 3

    D. Nominal interest rate before and after the investment

    I don’t know how to calculate nominal interest rate

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    Icon20 Fragrance of love

    plzzzzzzz help i need solution

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    Idea Solution

    C = 100 +0.75Y

    where Y means Income and income bhi hamen di gae hai which is 15000 of after investment

    so Y (income) = 15000 equation mein put ker dein

    C = 100+ 0.75 (15000)

    C = 100 + 11250 = 11350


    B. Government spending multiplier before and after the investment

    Government Spending Multiplier = 1/MPS

    Before = 3.33

    After = 4


    C. Tax multiplier before and after the investment

    Tax multiplier = - MPC/MPS

    Before = -2.33

    After = -3

    Part D: Nominal Interest Rate

    I = r + π

    π = inflation rate

    r = real interest rate

    so I = 5.5% + 2.1% = 7.6% (before investment)

    I = 5.7% + 2.5% = 8.2% (after investment)

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    Idea Solution

    C = 100 +0.75Y

    where Y means Income and income bhi hamen di gae hai which is 15000 of after investment

    so Y (income) = 15000 equation mein put ker dein

    C = 100+ 0.75 (15000)

    C = 100 + 11250 = 11350


    B. Government spending multiplier before and after the investment

    Government Spending Multiplier = 1/MPS

    Before = 3.33

    After = 4


    C. Tax multiplier before and after the investment

    Tax multiplier = - MPC/MPS

    Before = -2.33

    After = -3

    Part D: Nominal Interest Rate

    I = r + π

    π = inflation rate

    r = real interest rate

    so I = 5.5% + 2.1% = 7.6% (before investment)

    I = 5.7% + 2.5% = 8.2% (after investment)

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    Solution:
    C = 100 +0.75Y
    where Y means Income and income bhi hamen di gae hai which is 15000 of after investment
    so Y (income) = 15000 equation mein put ker dein
    C = 100+ 0.75 (15000)
    C = 100 + 11250 = 11350

    B. Government spending multiplier before and after the investment

    Solution
    Government Spending Multiplier = 1/MPS
    Before = 3.33
    After = 4

    C. Tax multiplier before and after the investment
    Solution
    Tax multiplier = - MPC/MPS
    Before = -2.33
    After = -3


    D: Nominal Interest Rate
    Solution
    I = r + π
    π = inflation rate
    r = real interest rate
    so I = 5.5% + 2.1% = 7.6% (before investment)
    I = 5.7% + 2.5% = 8.2% (after investment)

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