vu cs403 Mid Term Subjective Solved Past Paper No.4

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1. Money demand Md increases with income levels. Money demand Md falls with interest rates.
2. In this concept we are talking about real income and real interest rate not the nominal income and nominal interest rate. So this implies to the demand of real money.
3. Whether nominal and real money supply is equal or not depends much on the assumption regarding prices. If prices are assumed fixed, then the two are equal, otherwise not.
4. As you can see from the diagram where money demand in on the x-axis and income is on the y-axis, and there are various level showns like L1,L2,L3.

Price	Quantity demanded
2.5	400
5	200
10	100
20	50
40	25

1. Calculate the total revenue from this table.
2. Interpret whether the demand is elastic, inelastic or unitary elastic and why?
3. What will be the shape of demand curve according to the above tableDraw the graph.

There is solution for how can a current account which is in deficit be restored to balance under fixed exchange rate regimes. The answer is "Economic Deflation"

Economic Deflation says When a country's national income rises, it spends more; part of that spending falls on imported goods; higher imports cause the current account to worsen.

The reverse is also true for this lower income must reduce import spending and therefore improve the current account spending.

However, economic contraction is not a good idea to restore current account equilibrium the other alternative solution presented by economist is to devaluate or "devaluation".

Devaluation is the phenomena related to exchange rate where exchange rate faces depreciation but in the context of fixed exchange rates. The complement of devaluation is revaluation.

A concept of devaluation is to bring the exchange rate in line with its long-run equilibrium level, i.e. a level consistent with international competitiveness.

Competitiveness is simply defined as the real exchange rate RER, where RER = (Pf/Pd)*NER. Where

NER Nominal Exchange rate

Pf is the price level prevailing in the foreign country (US)

Pdis the price level prevailing in the home country (Pakistan).

The formula implies that, for a fixed NET if inflation is higher in Pakistan (relative to the US), Pakistani exports will become less attractive in the international market. As a result, our exports will fall, and current account will go into deficit.

To fix this problem, the NER can be devalued so as to make our goods cheaper and competitive and it is to bring competitiveness back to its original higher level. However, there are many provisos attached to the devaluation policy prescription.

Devaluation only works if the country's exports and imports are elastic, otherwise the price effect of the devaluation will dominate the volume effect and the current account will worsen. Secondly, the country must have excess productive capacity in order to meet the higher demand for exports that is created as a result of the devaluation.

In economics, crowding out is any reduction in private consumption or investment that occurs because of an increase in government spending. If the increase in government spending is financed by a tax increase, the tax increase would tend to reduce private consumption. If instead the increase in government spending is not accompanied by a tax increase, government borrowing to finance the increased government spending would increase interest rates, leading to a reduction in private investment, although there is no empirical evidence that supports such interest rate effect on investment

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In this phase

1. 1- Decisions related expenditures are carefully decided.
2. 2- High managerial staff hired at head office to have good check and balance on line managers.
3. 3- Return on Investment is an important key in this phase and every product is treated as investment.

You may have noticed that the role of a Certification Authority is analogous or similar to a passport office. The issuance of passport by the passport office attaches credibility that this particular person is entitled to travel. However, the passport is not issued by the office until detailed enquiry/verification about the identity of the person is made. Once a person holds the passport, that confirms that this particular person whose, name, address etc. is appearing on the passport is entitled to travel. Similarly, if a digital certificate is issued by a reputed CA that would confirm to other people that this particular public key certified by the CA belongs to this individual only.

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