DOUBTS

[Anjali]

Q1 In an economy where all commodities are produced with labour alone,0.5 unit of labour is required to produce a commodity A and 1 unit of labour is required to produce commodity B.If the international price of B is 2.5 units of A and if the total amount of labour in economy is 100 units , how much commodities will economy produce?
a 200 units of A,0 unit of B
b 57.14 units of A and 71.04 units of B
c 71.04 units of A and 57.14 units of B
d 0 unit of A and 100 units of B


Q2 Which of the following is true for government budget?
a the revenue deficit is always less than budget deficit
b the revenue deficit is always less than or equal to budget deficit
c the revenue deficit is always greater than or equal to budget deficit
d none of d above

Q3 In the IS LM model if economy is at liquidity trap  and aggregate investment expenditure is unaffected by current income ,a rise in government expenditure(other things equal) would lead to rise in equilibrium value of
a dd for money
b rate of interest
c aggregate savings
d aggregate investment

[bhavya jain]

1) b
2) b
3) a

[Anjali]

Bhavya how did you do ques 1 ?

[Aish]

How to proceed with que 1?

[Homer Simpson]

1(d)
2(b)
3(c)

[aman]

how to solve 3?

[Anjali]

But tsuki why not a for 3rd ?
Fiscal expansion leads to output expansion in liquidity trap ?
And how did you do ques 1 ?

[Homer Simpson]

for 3, it cant be (a) because the immediate consideration is for IS curve as G rises. we know that at equilibrium, S = I+G (here I is unaffected)

for 1, take price of A = 1, then price of B = 2.5
PPF is a straight line with x-intercept at 200 and y-intercept at 100
calculate value earned from each option - (d) will yield the most revenue
additionally (b) and (c) anyway wont be considered because i will have some underutilized labor

[Anjali]

But tsuki since in liquidity trap , interest rates are not changing , I will remain unaffected ( assuming autonomous component to be constant ) . In that case , G has a direct impact on increase in income. I suppose it should be a .

[Anjali]

Tsuki in ques 1 , cost price of a labour is not mentioned . So how to compare the cost and revenues ?

[Anjali]

For ques 1 , if you are just taking in the value of labourers and comparing their international value , then yes ans should be D
But suppose the revenue of D , was equal to that of either of B and C , then what would be our choice ? I mean do we incorporate under utilisation of labour in such ques ?

[aman]

If an economy is a price taker in world markets for both export and import, the real exchange rate devaluation a.will have no effect on the balance of trade
b. will cause the balance of trade to improve
c. will cause the balance of trade to deteriorate
d. will turn a trade deficit into a balance

[Homer Simpson]

Anjali, for 1, first of all consider how much of A and B the country can produce - that would be (L/labor unit) which means 200 and 100 respectively. L = 100 here

I have been told that price of B is 2.5 times price of A. Let price of A be 1 - so price of B is 2.5

Now, if i produce 200 units of A, i would earn 200 and if i produce 100 units of B, i get 250
for (b),Revenue = 177.6 + 57.14 = 234.74
for (c) R = 213.89

the point i made about underutilizing labor is not important to this question. it was just something which struck me when i was considering option (c). so no need to worry about that!

[Homer Simpson]

as for 1, I is unchanged and we require S = I+G, so if G rises, shouldnt S rise as well? All of this additional income isnt invested, it gets saved.

[Anjali]

No Tsuki , why would we save ? When interest rates are almost 0 , why would one save ?
So at any interest rate , we would demand any quantity of money .

[Anjali]

Tsuki for ques 1 , o.5 labour is required for producing 1 unit commodity of A. So 50 will produce 100 units. Is that so ?
How have you taken 200 for A and 100 for B ?

[Anjali]

Tsuki any final answer for this one ?

1. If a.b < c.d, where a, b, c, d are non-zero numbers, then it must be that
(a) a/c < d/b                 (b) a/c < d/b, if a.b > 0                 (c) a/c > d/b, if a.b > 0 (d) None of the above

[Akshay Jain]

The ans is d for 1st
tsuki's approach is correct.....
here if nothin is mentioned about the economy den we assume a small open economy and small open economy cannot influence the international price given in the ques....

[Anjali]

But Akshay she has incorporated international prices in calculating the value earned
Could you please elaborate
Also , what about ques 3 ?

[Akshay Jain]

This ques is of calculating the gains from trade
If the economy is closed den the max amt that it vl b able to produce of A is 200 and of B is 100
but in case of open eco with given international prices it will get 250 of A for exchange 100 of B...and 250>200
gains from trade is 50 units of A