(Individual) Assignment # 2

(Spring 2014)
ECO-104 Principles of Macroeconomics

Deadline: One Week Total Marks: 50
Note: Answer all the questions. Avoid unnecessary details.

Q.1 a) Differentiate between gross investment and net investment. (2)
b) What is the relationship between GDP and consumption? (2)
c) What impact do new products and quality adjustments have on
the CPI? (2)
d) What is the MPC? How does one find the MPC? How is it related to the
aggregate expenditures function? (2)
e) Explain how the multiplier is related to the MPS. (2)
f) Define economic growth and briefly explain its significance for
the economy. (5)

Q.2 a) Linear equations for the consumption and saving schedules take the general
form C = a + bY and S = -a + (1-b)Y, where C, S, and Y are consumption, saving, and
national income, respectively. The constant a represents the vertical intercept, and b
represents the slope of the consumption schedule.

i) Use the following data to substitute numerical values for a and b in the
consumption and saving equations: (4)

National Income
(Y)
Consumption
(C)
Rs. 0 Rs. 70
140 120
190 170
240 220
290 270

ii) What is the economic meaning of b? Of (1-b). (1)

b) Show that (i) Y = C + S, (ii) 1= MPC + MPS, and (iii) 1= APC + APS (5)

Q.3 a) An economy has been described by the following functions:
_ _
C = 50 + 0.8YD, I = 70, G = 200, t = 0.20,
YD = Y T and T = tY
Calculate the equilibrium level of income and the multiplier in this model. (5)



b) Consider the following data of a hypothetical economy on Income and
consumption, and complete the table. (10)

Level of
Output and
Income
(GDP = DI)



Consumption



Saving



APC



APS



MPC



MPS
$240 $ -4
260 0
280 4
300 8
320 12
340 16
360 20
380 24
400 28

Q.4 Using the following national income accounting data, compute (a) Real GDP, (b)
Per-capita GNP (c) National Income, (d) Private Savings as percent of NI, and (e)
Inflation rate. (10)
(In Millions)
Government purchases of goods and services Rs. 59.4
Exports Rs. 17.8
Personal Consumption Expenditures Rs. 219.1
Gross Private Domestic Investment Rs. 63.9
Net Factor Payments from abroad Rs. 2.2
Imports Rs. 16.5
Population 7.5
Consumption of Fixed Capital Rs. 11.8
Indirect Business Taxes Rs. 14.4
Personal Taxes Rs. 40.5
Transfers received from the government Rs. 13.9
Interest Payments on the governments debt Rs. 2.8
Compensation of Employees Rs. 194.2
GDP Deflator (Base Year = 100) 120
Corporate Profits Rs. 54.5
CPI (Base Year = 100) 121.5
Nominal Interest Rate 11%