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1.
1 Let’s consider a hypothetical economy where this year’s money supply is Tk.100, nominal GDP is
Tk. 40000 and real GDP is Tk. 5000.
a) What does the quantity theory of money say?
b) Calculate the price level.
c) Calculate the velocity of money.
d) Suppose the central bank changes the money supply so that the new money supply is Tk. 500, calculate the new price level.
e) Show stages b and d on a graph.
2. What is productivity? Describe the factors of productivity.
2.If in a competitive market there are both positive externalities on the consumer side and negative externalities on the production side, then
| a. |
MSB > P = MPC < MSC |
|
| b. |
MSB = P = MPC = MSC |
|
| c. |
MSB = P = MPC < MSC |
|
| d. |
MSB > P = MPC = MSC |
|
| e. |
MSB = P > MPC = MSC |
3.
If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, what you have to pay your lawyer would be considered a(n):
| a. |
External cost |
|
| b. |
transaction cost |
|
| c. |
marginal benefit |
|
| d. |
social cost of the pollution |
|
| e. |
social benefit of the pollution |
4.The price of automobiles rises. Discuss the effect of this on the demand curve for petrol (gasoline or fuel). To be specific:
1.
(a)
Quantity theory says that the product of money supply (M) and velocity of circulation of money (V) is equal to the product of price lebel (P) and real GDP (Y). So,
M x V = P x Y, where (P x Y): Nominal GDP
(b)
P = Nominal GDP / Real GDP
= 40000 / 5000
= 8
(c)
V = (P x Y) / M
= 40000 / 100
= 400
(d)
New value of P = (M x V) / Y
= (100 x 500) / 5000
= 10
(e)
This can be shown in terms of an AD-AS model.
In following graph, initial full-employment equilibrium is at point A where AD0 (aggregate demand) and LRAS0 (long-run aggregate supply) curves intersect with initial equilibrium price level P0 (= 8) and initial equilibrium real GDP Y0 (= 5000).
After money supply increases, aggregate demand increases. As per Classical model, real GDP stays the same and only price level increases. In the graph, AD0 shifts right to AD1, intersecting LRAS0 at point B with higher price level P1 (= 10) and sane real GDP Y0 (= 5000).please see the attached file.
2.option a is correct
Marginal social benefit > Price (positive externality ), equal to , Marginal private cost <Marginal social cost (negative externality)
3.The payment made to the lawyer would be considered an------
(a) External cost
Explanation-----
An external cost is such a negetive Externality , which imposes a negetive effect on an unrelated third party.
It is an uncompensated cost that an individual or firm imposes on others.This cost is related with the environmental consequences of Production and use.
4.Automobiles and petrol are complements hence when price if automobile rises the demand for automobile will come down hence the demand for petrol will also fall. Hence consumer will demand less at the same price hence the demand curve will shift leftward.
