M II

CHETAN SARUP ROHILLA

MBA07190 B 30/11/2021

MACROECONOMIC ENVIRONMENT

Prof. Mohd Hussain Kunroo

Declaration:

1. I have submitted faculty feedback 30 minutes prior to appearing in the End-Term Exam.
2. any other sources.

Signature of the Student

Ans1) If the current administration decreases government expenditure, then the aggregate
demand curve shifts leftwards as the aggregate demand decreases which will lead the Short-
Run Aggregate supply Curve to move downwards. It will lead to deflation and lower aggregate
output. Decreasing the government spending will facilitate a negative demand shock and will
cause less quantity of goods to be consumed and those customers still in market pay a lower
price for the good.
Ans2) Given, C= 50+ 0.8Yd, I= 100, G=T=75

Since,

Y= C+I+G
Y= 50 + 0.8Yd +100 +75
Y= 50+ 0.8(Y-75) +100 +75
Y= 225 + 0.8Y – 60
0.2Y = 165
Y = 825
Yd = Y – T = 750
C= 50 + 0.8 Yd = 650
Equilibrium Income = 825
Multiplier = 1/(1-c) = 1/ (1 – 0.8) = 5
Ans3) Given,

c = 0.8 and t=0.25

We Know that,

Y=C+I+G+X-M
Y = 100 + c*(Y - 50 - tY) + 50 + 50 + 10 - 5 - 0.1Y
Y = 100 + 0.8*(Y - 50 - 0.25Y) + 50 + 50 + 10 - 5 - 0.1Y
Y = 205 + 0.8*(0.75Y - 50) - 0.1Y
Y = 205 + 0.6Y - 40 - 0.1 Y
0.5Y = 165
Y = 330
A) Nation Income at equilibrium level is 330
B) Foreign Trade Multiplier(m=0.1) = 1/ (1 - c +ct +m) = 1/ (1 - 0.8 + (0.8) *(0.25) + 0.1) = 2
C) Equilibrium value of imports = 5 + 0.1Y = 5 + 0.1*330 = 38
D) Since it is given that equilibrium national income falls short of full – employment income
by 50 so,
Y(F.E.) = 330+50= 380
380= 100+ 0.8*(0.75*380-50) + G*+ 50+10-5-0.1*380
Hence,
G*= 75
G*-G = 75-50= 25
Hence the government should increase its expenditure to attain full- employment in the
economy is 25.