Question

1. Write about recessionary gap (graph optional). Give the definition, and as a policy maker suggest one way to eliminate the gap (10 points)
2. What is the definition of Nominal GDP, Real GDP and Potential GDP? (10 points)
3. Assume the propensity to consume is 60% (MPC= 0.6). Calculate the value of the multiplier (10 points)
4. Briefly contrast the classical economists view and the modern economists view about Economic Stabilization (10 points)
5. Give the definition of Gold Standard and write about Bretton Wood System (10 points)
6. Write about comparative advantage in relation to international trade. (10 points)
7. Give the formula for equation of exchange and also give the assumption of Quantity Theory of Money about the equation of exchange comment on the second part (10 points)
8. Name two important tools of Fiscal Policy that the government uses to stabilize the market. Write about one of them and explain how it works (assume the economy is in recession and government wants to increase aggregate demand (GDP) and create more jobs (10 points)
9. Last week we paid $1.25 for a euro. This week we pay $1.10, assuming that euro didn’t go through any devaluation or revaluation, Is the dollar appreciated or depreciated? (10points)
10. Write about self-correcting mechanism (10 points)   

Answer 1

Ans.

a) Recessionary gap is the difference between what an economy’s output is and what it can produce at full employment  level.

To eliminate the recessionary gap government should use fiscal expansion i.e increase spending so that consumption increases and output increases back to full employment level.

b) Nominal GDP is the market value of output in the economy at current prices.

Real GDP is the market value of the output in the economy at base year pricesz

Potential GDP is the output that an economy can make when unemployment rate is at its natural level.

c) Multiplier = 1/(1-MPC) = 1/(1-0.60) = 2.5

d) Classical economist gives little emphasis to the government intervention in economic stabilisation and emphasis use of monetary policy if necessary on the other hand modern economists places a great emphasis on the use of fiscal policy for economic stabilisation.

* As you have not mentioned whether all questions need to be done or not, so, I am attempting tge first 4. Please reupload the questions if you want their solutions and don’t forget to tell specifically which need to be done.