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SHORT ANSWERS:

 

1. Define balance of payment (BOP). How the BOP can be determined? 3 marks

Ans: BOP:

                  A systematic record of a nation's total payments to foreign countries, including the price of imports and the outflow of capital and gold, along with the total receipts from abroad, including the price of exports and the inflow of capital and gold.

 

BOP can be determined:

Ans: The BOP is determined by the country's exports and Imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

 

BOP as an indicator of economic and political stability:

BOP is difference the value of imports and exports of goods and services. If the imports value of goods and services is greater than exports then BOP is deficit, on the other hand, if exports value is greater than import value then balance of payment is surplus. In this way, BOP is used as an indicator of economic and political stability of any country, if BOP is surplus then it means the country is having good stability and is developing country or vice versa.

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2. It is said that growth is an important macroeconomic issue. Why? Discuss 3 marks

Ans: Economic growth is important if businesses are to grow and prosper. It relates to growth in the size and quality of the economy as a whole. Growth is measured as the change in the gross domestic product of a country, after subtracting inflation. The economic growth of a country when compared with rivals is an important indicator of rising opportunities for domestic business. The long-term path of economic growth is one of the central questions of economics today; an increase in growth rate of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding or exponential growth.

                                                       *********************
 3. Define unemployment? 3 marks

Ans: Definition:

An economic condition marked by the fact that individuals actively seeking jobs remain un hired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances.

 

Unemployment Rate:

The unemployment rate is defined as the ratio of the no. of unemployed people divided by the sum of the employed and unemployed people.

 

Types of Unemployment:
1. Frictional unemployment:
occurs when a worker moves from one job to another

2. Structural unemployment: is caused by a mismatch between the location of jobs and the location of job-seekers.

3. Cyclical unemployment: also known as demand deficient unemployment, occurs when there is not enough aggregate demand for the labor

4. Technological unemployment: is caused by the replacement of workers by machines or other advanced technology.

5. Classical or real-wage unemployment: occurs when real wages for a job are set above the market-clearing level.

                                                       ***************

6. What are the basic functions of Central Banks?

1. The single most important function of a central bank is to create an adequate supply of money for a government's use.

2. Acting as a lender of last resort to the banking sector during times of financial crisis.
3. To influence market interest rates of country.

4. Through open market operations, a central bank influences the money supply in an economy directly.

5. The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange.

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7. On what factors steady state growth rate of real GDP depends? (3)

Ans: The steady-state growth rate of real GDP depends on n and t, the exogenous rates of growth of population and technology. By exogenous, we mean determined outside the model. Thus, there were no policy insights for how
governments could affect the steady state growth rates of countries. In
particular, the model suggested that higher savings could only have a level
effect on income, not a long-term growth effect as had been earlier thought.
The reason was that savings-enabled investment and capital accumulation
eventually banged into diminishing returns.

 

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8 Why Marginal Revenue and price are equal under perfect competition?

Ans: Marginal revenue under perfect competition:

Marginal revenue is the extra revenue generated when a perfectly competitive firm sells one more unit of output. It plays a key role in the profit-maximizing decision of a perfectly competitive firm relative to marginal cost.

Marginal revenue=          change in total revenue

                                              change quantity

 

Price under perfect competition:

Price under perfect competition is determined by the forces of demand and supply of the industry. The price once fixed up by the industry is taken up by all the firms and the firm can sell any number of units at hat price. The firm may earn normal profits, super normal profits in the short run whereas it earns normal profits in the long run.

                                        *******************

9. What is the reason of poverty in developing countries according to Prebisch singer hypothesis?:3m

Ans: Following are some reasons of Poverty in developing countries according to PSH:

1.     Lack of human, social and public capital in LICs( Lower income countries)

2.     Very fast rising populations in LICs

3.     Lack of precious natural resources (like oil, gold, gas, iron, copper etc.)

                     ***********************

10. Differentiate b/w actual GDP and potential GDP?:3m

ANS: Actual GDP:

                          Actual GDP is what an economy actually produces.

                                                       While

 

Potential GDP

Potential GDP is what the economy would produce if all its resources vis. Land, labor, and production capacity were fully employed at their normal levels of utilization.

 

GDP Gap:

The forfeited output of a country's economy resulting from the failure to create sufficient jobs for all those willing to work.

OR

The difference between potential and actual real GDP, expressed as a percentage of potential real GDP.

The GDP gap or the output gap is the difference between actual GDP and potential GDP or potential Output.

At the time of the economic boom, actual GDP crosses the potential GDP, thus generating a positive gap. During recession the GDP gap is negative.

                                                    **********************

 

11. What type of taxes govt. can impose? Explain them briefly?

1. Direct tax

2. Indirect tax

3. Regressive tax

4. Proportional tax

5. Progressive tax

 

  1. Direct tax:

                               A tax on income, including wages, rent, interest, profit, and (usually) transfer payments is known as direct tax or income tax.

       *Personal income tax:

                                         A tax on individual income. This is the primary source of revenue for the federal government, a big source for many state and local governments.

       *Corporate income tax:

                                            A tax on the accounting profits of corporations. This tax is only levied on corporations, and excludes businesses that are Proprietorships or partnerships.

 

2. Indirect tax:

             *Sales tax: A tax on retail sales.

             *Excise tax: A tax on a specific good. This should be compared with a general sales tax, which is a tax on all (or nearly all) goods sold.

             *Value-added tax: A tax on the extra value added during each stage in the production of a good.

 

3. Proportional tax

It is a tax in which people pay the same percentage of income in taxes regardless of their incomes.

 

4. Progressive tax

It is a tax in which people with more income pay a larger percentage in taxes.

 

5. Regressive tax

It is a tax in which people with more income pay a smaller percentage in taxes.

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12. Write the difference between cost push inflation & demand pull inflation with example?

Ans: Cost push inflation:

            It is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. Also called cost inflation, it is the opposite of demand-pull inflation.

Causes:                 

  • Increases in factor prices e.g. oil price increase.
  • An increase in wage settlements in excess of any increase in productivity.
  • A devaluation or depreciation of currency leading to an increase in import prices.
  • Interest rate increases will increase the cost of borrowing.
  • Indirect taxation or the removal of subsidies

                                      While

Demands pull Inflation:

A term used in Keynesian economics to describe the scenario that occurs when price levels raise because of an imbalance in the aggregate supply and demand.

REASONS FOR THIS INFLATION:
1. Increase in wages and salaries
2. Increase in profit margin
3. Decrease in productivity
4. Cost of imported capital and intermediary goods
5. Natural disasters

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13. “Slope of consumption function is less then 1” What its mean is?
It means that for every extra dollar you get in income, you spend less than one dollar. This relationship is also called the marginal propensity to consume, which is less than 1 and greater than zero.

Or

The slope of the consumption function is called the "Marginal Propensity to Consume". It is assumed to be between zero and one, which means that each one more dollar of disposable income will increase one's consumption by less than one dollar.

                                                *******************

14. At what point, the equilibrium occurs in the foreign exchange market?

Ans: the equilibrium occurs in the foreign exchange market at the point where the foreign exchange demand and supply curves intersects. 

 

15. What are the reasons that poor countries remained poor?

  • Not enough natural resources. For many centuries this was a popular reason, and maybe it applied when transportation was so expensive that trade could not supply what a country (or region of a country) lacked.
  • Overpopulation. The most populous country in Europe is the Netherlands, and the most populous state in the US is New Jersey. Both are among the most prosperous.
  • Lack of skills. This is popular today. However, India has many skilled people who cannot find jobs.
  • Traditional modes of production and traditional organization of society. This has been very important, and traditional producers often have the political power prevent competition. The most spectacular example of this is the ability of Japanese farmers to prevent competitive imports, given that Japan is an otherwise very progressive nation.

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16. Explain the difference between appreciations and depreciation of currency.

depreciation A decline in the value of one currency relative to another currency. Depreciation occurs when, because of a change in exchange rates; a unit of one currency buys fewer units of another currency.

Appreciation Currency Appreciation means that the given currency has become more valuable with respect to another currency. For example if the rupee appreciates it means that rupee has become more valuable in relation to dollar. In case of appreciation a "downward" movement takes place. For instance if the rupee moves downwards from 50 per dollar to 40 per dollar then rupee is said to appreciate.

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17. Differentiate among M0, M1 and M2 components of money supply?

There is a process by which money is created – the money supply process, and there are ideas about why people hold money – money demand theories. We’ll tackle these in order and then develop an under standing of money market equilibrium. Before getting a handle of the money supply process, we must understand the various definitions of money supply (denoted by Ms). At this introductory stage, we’ll introduce only three definitions:

a. M0: also called base money, high powered money or the monetary base. M0 is the value of all the currency notes and coins that are in circulation in the economy. Note that any currency or coins lying with the central bank (which in Pakistan’s context, would be the State Bank of

Pakistan) does not count as M0, as it is not in circulation.

b. M1: is M0 + all current (or checking) deposits held with commercial banks. Checking deposits are accounts from which the holders can withdraw money at any time.

c. M2: is M1 + all time deposits. Time deposits are accounts from which holders can withdraw money only after giving the banks some notice (usually a few months). When talking about money supply, this is the measure we often refer to. The relationship between M2 and M0 is the key to unraveling the money supply process.

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18. Define fiscal policy. Differentiate between contractionary and expansionary fiscal policy. In which situations, budget deficit and budget surplus exist?

Definition:

Decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the

 

Contractionary fiscal policy:  A form of stabilization policy consisting of a decrease in government spending and/or an increase in taxes. This policy is designed to avoid or correct the problems associated with a business-cycle expansion that gets out of hand and causes inflation.

                                                                  While

Expansionary fiscal policy:

It is a form of stabilization policy consisting of an increase in government spending and/or a decrease in taxes. This policy is designed to avoid or correct the problems associated with a business cycle contraction.

 

Budget Deficit:

If i>ii: the government is said to be running a fiscal or budget deficit and so the government must borrow (or raise debt) to cover the deficit.

Budget Surplus:

If i<ii: the government is said to be running a fiscal or budget surplus and so the government can pay-off or reduce its debt.

Balanced Budget:

If i=ii: the government is said to be running a balanced budget and the government’s net debt may remain constant.

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19. Define foreign exchange markets. Also give some examples of foreign exchange markets.

Ans: Global market in convertible currencies is traded and their conversion rates are determined. It is the world's largest financial market in which every day, on average, some one and one-half trillion dollar worth of currencies are bought and sold. Out of this only about 15 percent is traded for goods or services, the balance 85 percent is traded by the individual and institutional speculators.

UK , GERMANY, JAPAN ETC.

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20. Differentiate between Gross National Product and Net National Product by giving their formulas.? (5)

Ans: The Gross National Product (GNP) is the value of all the goods and services produced in an economy, plus the value of the goods and services imported, less the goods and services exported.

                                               While

The total amount of goods and services produced in a nation in a given period of time less the quantity of goods and services needed for its production.

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