POKHARA UNIVERSITY

Introductory Macroeconomics Fall 2017

1. What is the scope of Macroeconomics?
2. What is the essence of Say’s Law of Market?
3. Find out the value of the GDP deflator when real GDP is 117.43 million and nominal GDP is 111.37 million.
4. Suppose C= 100+o.5Y, I= Rs. 200, G=400. Find the value of the investment multiplier.
5. Distinguish between Average and marginal propensity to consume.
6. What are the determinants of investment?
7. Define the term budget deficit.
8. State the relationship between unemployment and rate of inflation according to Philips.
9. What are the major features of the depression phase of the trade cycle?
10. Point out instruments of monetary policy.

Section “B”

Descriptive Answer Questions

11. Define Macroeconomics. Discuss the important issues addressed by macroeconomics prevalent in the current global economy.

12. Define National Income. What are the different concepts of National Income? Explain.

13. Explain the determination of the equilibrium level of employment under the principle of effective demand.

14. Suppose the structural model for the product market is given as:

C= 100+0.75Yd, I=50-25i, T= 50, G=50

Similarly, the money market model is given as:

Mt= 0.5Y, Msp=105-1500i and Ms= 150

where the symbols have their usual meanings.

a) Derive the IS and LM functions.

b) Use the IS and LM relations from (a) to solve for the equilibrium levels of output (Y) and interest rate (i).

c) use the answers from (b) to find values for C ( consumption) and I (Investment) in this equilibrium.

15. Consider the following consumption schedule.

Answer the following questions:

a) Complete the above schedule.

b) Drerive consumption and saving curves.

c) Does it explain three propositions of the psychological law of consumption? Explain.

16. Define inflation. What are the major effects of inflation? Explain.

17. Differentiate between fiscal and monetary policy. Discuss the instruments of fiscal policy.

Section “C”

Case Analysis

18. Read the situation given below and answer the questions that follow:

Looking at the last 10-15 years, Nepal’s overall economic growth rate hovers around an average of 4%. Of late, this growth has faltered further, with estimates of rates as low as 0.77%, owing to economic shocks initially due to the earthquake and later by the supply chain disruption resulting from political agitations and blockade. This economic downturn has compounded the already high disparity across various facets as well as the incidence of poverty.

Under such circumstances, the economy has only been able to sustain primarily due to high inflow of remittances equivalent to 32% of the GDP; which are mostly geared towards consumption purposes leading to higher imports and thus higher government revenues from customs and value-added tax. On the other hand, exports have not been encouraging as export-to-GDP stands at a mere 3%.

Keeping this in mind, the focus should be on two things i.e size and speed at which growth occurs and balancing regional and ethnic discrepancies.

Firstly, the current 4% growth has to scale up to at least 8% in the course of 6 to 8 years. With demographic dividend favouring the country at the present, it is crucial that the state fully utilize this window of opportunity in time. Otherwise, the country would be limited to just a subsistent economy, dependent on neighbouring economies and unable to extract benefits of their prosperity.

Secondly, Nepal needs to stride in capturing the competitive edge of regions, be it in tourism, hydropower, or likewise, to ensure disparities across different regions and narrowed and opportunities created. Similarly, positive discrimination and targeted programmes must be present to uplift certain sections of the population.

To achieve inclusive growth, a shift in policies on three key areas could be noted in the years to come

Forging Competitiveness 

firstly, policies to supplement in forging competitiveness across potential sectors should gain prominence. For instance, agriculture production has predominantly been cereals-centric; with 82% of total arable land devoted to it, while high-value crops(HVCs) only hold 18%. HVCs and medicinal and aromatic plants(MAPs) exhibits great potential for export as their demand appear to be rising at very fast.

Harnessing export potential:

Especially, in hydropower, the potential for export is further boosted given the growing global emphasis on clean energy. Similarly, some areas of agriculture products that have a comparative advantage in Nepal, could be further promoted for exports. Nepal has the potential to export products across the borders especially to the Indian states bordering Nepal and integrate the country’s agriculture system in the value chain network with the companies working in India and beyond. In addition, Nepal has a high potential to expand IT outsourcing activities. Wages are rapidly rising in India and Nepal can take benefit from it. Tourism could be a force for inclusive growth, offering jobs for lower-skilled people and bringing economic benefits to areas of the country without any other sources of Income. It could also be transformational if higher value products and services could be developed.

Leveraging Regional economy:

Given the growth and size of the neighbouring economy, Nepal should attract Indian and Chinese companies given that their market is expanding rapidly and their increased outward investment. There is also a possibility of relocation of industries from China and India. Nepal can become a strategic location for manufacturing components for multinational corporations.

Questions:

1. Define economic growth. Why is the economic growth of Nepal faltering in recent years?
2. In your opinion, what is the appropriate strategy to utilize remittance received by the country?
3. In order to increase the rate of growth of the economy, export should be increased. Justify this statement.
4. Which area and policies should be focused on to achieve inclusive growth of the country?
5. What kind of macroeconomic policy is suitable for the Nepalese economy to develop the country? Why?