LOVELY PROFESSIONAL UNIVERSITY

Homework-II
School : LHSB Department of Management
Name of the faculty Member : Dr. Subhendu Dutta
Course No. ECO161 Course Title: Macroeconomic Theory
Class: BBA Section Q1005
Max. Marks : 5 marks Date of Allotment 1/2/11 Date of Submission 10/2/11

S.No Roll No Objectives of Academic Topic Organization Evaluation Details

Activity
1 All students To understand the basic All Topics Students will attempt all
concepts of
the questions and
Macroeconomics like
national income, Real GDP, submit the same.
Nominal GDP.
Subsequently random

questions will be

evaluated. Assignments

will be submitted only

through UMS.

Date: Signature of Faculty member

Signature of COS-F
 HOMEWORK-II
ECO161: Macroeconomic Theory

The boom in demand for apparel and mobile phones may soon be over as Indians plan to spend less on fun
and entertainment to deal with rising food prices, a Nielsen study says.
Indian consumers are extremely cautious about rising food prices and a sizeable section may defer
purchases by 6-12 months, says the latest Nielsen global consumer confidence index released on Monday.
Some companies, including LG Electronics and Future Group, agreed to slowing demand, while others
such as Reliance Retail and Marico expect consumers to keep up with their spending spree. Seven out of 10
Indians have changed their spending habits to save on household expenses in the last one year. “As a
significant amount of disposable income goes into food consumption, consumers are becoming cautious,”
said The Nielsen Company India managing director—consumer-—Justin Sargent.
The segments expected to impact most are apparel, out-of-home-entertainment and gadgets like computer
and mobile phone.
India has been experiencing high inflation for some time now. Although the government and the central
bank have taken several steps including increasing interest rates, allowing duty free imports of sugar and
onions and banning exports of edible oil and wheat products, so far there is not much success in checking
food inflation.
On an average, prices of fruit and vegetables in the country have gone up by around 50% in the last one
year.
The country’s top consumer durable firm is already facing the heat. “There are signs that the durable
sector may see a slowdown, especially in highticket items,” said LG Electronics India’s sales head, Amitabh
Tiwari.
“In January, there has not been as many consumers as we had anticipated,” he said. “In fact, the market
for LCD, Plasma and LED TV was quite bad.” Future Group CEO Kishore Biyani too said there has been
postponement of purchase in some segments.
“But it is difficult to predict since Indian consumers’ behaviour is very differently and erratic,” he said.
“Only those consumers who spend around 40-50% of their income on food items will cut down
discretionary spend,” Biyani added.
Some economists ET spoke to expect middle-class consumers to postpone purchase of lifestyle and
discretionary products as well as premium consumer goods. NCAER Centre for Macro Consumer Research
director Rajesh Shukla said some product segments will take a hit as consumers plan to postpone purchase
of several non-food items that account for about one-third of their total expenditure.
Food price is a major concern across the world. “Globally, after economic growth, it is food prices which
is of prime concern,” Nielsen’s Sargent said. “India ranks fourth globally, while China tops the list,” he
added. The study said that while there has been a resurgence in consumer spends in the second and third
quarters of calendar 2010, the last quarter showed a decline in spending intentions in India.

Answer the following questions:

Note: No assignment shall be catered after the date of submission.

1 Indian consumers have cut down their spending recently mainly on lifestyle and
discretionary products and a sizable section of them have even deferred purchases by a
couple of months. Do you think that effective demand has been affected? Explain.
[1]
Ans. Yes, the demand for the lifestyle and discretionary products will decrease due to the
inflation conditions prevailing in the country. Food inflation has reached a mark of near 18
percent in the country. People have to spend more on the food items and they have to pull
their hands on luxury items.
2 Explain any one measure taken by the government recently to check food inflation in the
country? [1]
Ans. Government has been taking some long and medium term measures to control the
situation. India has banned the export of onions, edible oils, pulses. A temporary ban on
wheat export was being considered, PTI news agency reported citing government sources.
The government is also importing onions from Pakistan.

3 Do you think that APC is rising while APS is declining? Explain. [1]
Ans. Yes, APC is rising while APS is declining as we consume more automatically our
savings would be less and vice versa. Average Propensity to Consume is the ratio of total
consumption to the total income and Average Propensity to Save is the ratio of savings to
total income.

4 Investment demand in the Indian economy will not be affected. Is the statement true?
Explain. [1]
It will be affected by two factors:
1. Marginal Efficiency of Capital- MEC is the expected return that comes from new
asset. If MEC is high people will invest more and vice versa.
2. Rate Of Interest- It is the general rate at which commercial bank lends loans to the
common of people. If the rate is high the investment will be less.

5 Suppose the government cuts down the income tax rate by 10 per cent. What affect will it
have on spending? [1]
If the government cuts down the income tax rate by any percent, spending will rise. People
will purchase more as they have to give less tax on the products.