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ECO403 Macroeconomics Assignment 2 Solution Fall 2012

Egypt is one of the most popular tourist destinations in the entire world and growing economy of Africa. The Egyptian economy depends on petroleum exports, media, textile and tourism. In 2008, more than 12.8 million tourists visited Egypt providing revenues of nearly 1 trillion rupees. As tourism industry is the major source of revenue for Egypt, suppose government of Egypt invested Rs. 7 million on tourism to make it more attractive and comfortable for tourists. An overwhelming majority got benefit in the shape of employment, facilities and others. This temptation stimulated the other industries like cement, iron, chemical, tobacco, canned food, shoes and furniture. This boost not only changed the living standards but consumption, saving, inflation, employment, incomes aggregate demand were also improved. The consumption function for the people of Egypt before investment was C = 100 +0.70Y while it was C = 100 +0.75Y after the investment.
The analytical view before and after the government investment is given below:
Before investment After investment
Income
(Rupees)
MPC MPS Real interest
rate
Income
(Rupees)
MPC MPS Real interest
rate
10000 0.70 0.30 5.5% 15000 0.75 0.25 5.7%
This investment also increased the confidence of producers and consumers and
changed the other vital facts and figure of the economy which are given below.
Before investment After investment
Growth rate Employment
rate
Inflation
rate
Growth
rate
Employment
rate
Inflation rate
1.3% 5% 2.1% 2.99% 5.7% 2.5%
According to above facts and figures, government investment has uplifted the
other sectors of the economy.
Requirements:
Using the information given above, calculate:
A. Consumption of the people of Egypt from the given equation after the investment
B. Government spending multiplier before and after the investment
C. Tax multiplier before and after the investment
D. Nominal interest rate before and after the investment
(Note: Write down all relevant steps involved in calculation)

Solution:

C = 100 +0.75Y
where Y means Income and income bhi hamen di gae hai which is 15000 of after investment
so Y (income) = 15000 equation mein put ker dein
C = 100+ 0.75 (15000)
C = 100 + 11250 = 11350

B. Government spending multiplier before and after the investment

Solution
Government Spending Multiplier = 1/MPS
Before = 3.33
After = 4


C. Tax multiplier before and after the investment
Solution
Tax multiplier = – MPC/MPS
Before = -2.33
After = -3


D: Nominal Interest Rate
Solution
I = r + π
π = inflation rate
r = real interest rate
so I = 5.5% + 2.1% = 7.6% (before investment)
I = 5.7% + 2.5% = 8.2% (after investment)

 

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