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# ECO-403 Assignment No 2 Solution & Discussion Due Date: 07-06-2012

SEMESTER SPRING 2012
Macroeconomics (ECO403)
Assignment No. 02
Due Date: 07th June, 2012 Marks: 25
Assignment:
Many under developed countries are making their economies strong with the
passage of time. Senegal is one of them. After an economic contraction of 2.1% in
1990s, Senegal originated a major economic reform program with the support of
international donor community (IDC). Senegal is an under developed country
located in West Africa. The main industries are food processing, cement, fertilizer,
textile and tourism while exports include fish, fabrics and cotton. Major source of
revenue of the people of Senegal is tourism and agriculture sector. Known for its
mild climate, attractive forest, beaches and great fishing, Senegal has been highly
regarded by Europeans and Middle East tourists. Suppose for the development of
these places, government of Senegal increased its spending by Rs.7 million. This
spending not only attracted the tourists but also increased the consumption,
production and employment rate of the people of Senegal. Before this government
spending, marginal propensity to consume (MPC) was 0.5 while after this
spending, it became 0.7. As marginal propensity to consume had been changed
from 0.5 to 0.7, government of Senegal increased the tax rates; which in turn
increased the government revenue.
Requirements:
Part A:
Keeping in view the above data, calculate:
a. Government spending multiplier when MPC =0.5 and MPC = 0.7.
b. Tax multiplier when MPC =0.7.
c. Marginal propensity to save (MPS) of this economy when MPC =0.5 and MPC
= 0.7
Part B:
a. If government spending increases by 7 million, could total GDP increase by
Rs.7 million?
b. If MPC =0.7, by how much amount, GDP will decrease if taxes are increased
by 7 million.
(Marks =Part A=6+4+5, Part B=3+7)
Instructions:
 Write down formula and all relevant steps involved in calculations.
 Calculate to the point where calculation is being required. NO need to write
irrelevant material or extra interpretation.
 This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 01 to lecture no 26 and reading handouts as well as
recommended text book.
Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is
usually available to overcome uploading difficulties which may be faced by the
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and above mentioned due dates should always be treated as final to avoid any
inconvenience.
Important Instructions:
 Make sure that you upload the solution file before the due date. No
assignment will be accepted through e-mail once the solution has been
Formatting guidelines:
 Use the font style “Times New Roman”/ “Arial” and font size “12”.
 Use black and blue font colors only.
Solution guidelines:
 Every student will work individually and has to write in the form of an
analytical assignment.
 Give the answer according to question.
 For acquiring the relevant knowledge don’t rely only on handouts but watch
the video lectures and use other reference books also.
Rules for Marking
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DISCUSS HERE PLZZZZZZ

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### Replies to This Discussion

part B answer thek nahi hai, plz correct ans uploud.?

Part A:

a. Government spending multiplier when MPC =0.5 and MPC = 0.7.

If MPC = 0.5

And government spending = 1/1-MPC

=1/1-0.5 =2

If MPC = 0.7

And government spending = 1/1-MPC

=1/1-0.7 = 3.3

b. Tax multiplier when MPC =0.7.

Where tax multiplier

= -MPC/1-MPC

=-0.7/1-0.7 = -2.3

c. Marginal propensity to save (MPS) of this economy when MPC =0.5 and MPC

= 0.7

When MPC = 0.5

MPS = 1-MPC

=1-0.5 = 0.5

When MPC = 0.7

=1-0.7 =0.3

Part B:

a. If government spending increases by 7 million, could total GDP increase by

Rs.7 million?

Yes, If government spending increases with 7 million, GDP also increases by 7 million

b. If MPC=0.7, by how much amount, GDP will be decrease if taxes are increase by 7 million.

∆Y = (-MPC/1-MPC)* ∆T

= (-0.7/1-0.7)*7

= (-0.7/0.3)*7

= -2.33*7

= -16.1

Aik hi ans sb kiu send kar rahy ho,..... why?

jab ryt ha  t ik he krain gye na sir :P

result aye ga to pata chaly ga k kya right hai.......?

forPart B:

a. Ans: government spending at all levels increases, then GDP increases. Similarly, if government spending decreases, then GDP decreases. the Senegal Govt increase the spending therefore the GDP will increase and As marginal propensity to consume had been changed from 0.5 to 0.7 for generating revenue the Govt also increased the tax rate.

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