ISI Sample Paper 2013 ME-II Doubts

[Darth Vader]

Hey, any sort of clue or hints would be greatly appreciated.

8. A consumer consumes two goods, x1 and x2, with the following utility
function
U(x1, x2) = U1(x1) + U2(x2).
Suppose that the income elasticity is positive. It is claimed that in the
above set-up all goods are normal. Prove or disprove this claim.

7. A positive investment multiplier does not exist in an open economy
simple Keynesian model when the entire amount of investment goods
is supplied from import. Examine the validity of this statement.

[srawan]

7 .  i think ans-true
because if investment increases from i to 2i ,then extra investment is i ,due to this i demand increases by i ,but this all extra investment i is imported so this i is now income of a foreigner implies no multiplier effect and also  this import i would reduce demand of domestic goods by i , so overall net demand change is 0  therefor multiplier is 0

[laracroft]

hi

net demand change would have been zero if this would have been classical case, but here in keynsian model... shouldn't there be a positive multiplier effect because the increase in consumption does have a positive effect (as its not ordinary consumption, ultimately its being used for investment purpose only).
Though imports may have a negative effect but overall effect should be positive, i think.....

[MI]

Hey kawai,

You pointed out rightly that effect will be manyfolds in Keynesian Cross. But its still negative in this case.

E (Planned Expenditure)= C* + c(Y-T) - (I* -bi) + G* + NX (other than investment)

Let NX =  Export - Import = Export - mY

Where  m = marginal propensity to import

E = (C* + G* - I* - cT + Export) + cY - mY

....(For the sake of simplicity export component is assumed to be autonomous)

In equilibrium E= Y

Y ( 1-(c-m)) = Autonomous component of expenditure

Delta Y ( 1-(c-m)) =  - delta I*

Assuming interest rate to be constant....


So when Delta I* is positive output will decrease by

 - Delta I* / (1-(c-m))

please let me know if you find something objectionable

[laracroft]

Hi MI
Thank you soo much !! :)

[Sumit]

Hey MI,
which book did you refer for macro part???I completed Mankiw  n few chapters of Dornbusch & fisher still I fail to answer all the macro questions which I face....I asking this question to you coz I noticed that u answer Macro questions with quite an ease.which is absolutely stunning.... ..n also from where did you practicing question on it?????
Plz help..

[srawan]

delta i*=change in imports ,        i think u should  take this into accounting

[saureco]

Hey MI,

That sounds fair enough. I was thinking on some other lines. As the entire amount of investment goods are funded by imports then it should definitely be subtracted but where you've written -(I*-bi), I think this expression will entirely be 0 (as in we won't need to write it in the Income expression, Although its numerical value will be equal to some variable k of imports where 0<k<1) as it is already accommodated in the imports function i.e mY. Its like a part of imports are used for investment purposes. So what am trying to say is when there is an increase in investment there is a simultaneous increase in imports (which is where the investment is coming from in this particular case). We can say imports here are a function defined as m(Y,e,I). Where dm/dI will be +ve. Undoubtedly the answer here will also be a negative multiplier coz delta m will always have a -ve sign attached to it, I just tried explaining it a different way.


Your inputs are welcomed. :)

[MI]

Hey Saureco,

You have mentioned the transmission mechanism correctly. I also thought of it the same way.
The reason I wrote Investment separately because the question asks about the effect of "investment multiplier".

We can reach same conclusion by including investment in imports.

[MI]

Hey Sumit,

I am only following Mankiw. And trying to solve past year questions.

[Sumit]

@MI: I actually done ch-1 to ch-12 of mankiw (i.e till mundell-fleming model)....but done nothing after this at all..should I need to go for remaining chapters as well???? or can I do selective chapters???...plz advise...

[srawan]

8-     if ux1  and ux2  have diminishing mu  then -

mu1(only function of x1)/mu2(only function of x2)  =price ratio =fixed ,  


since income elasticities are positive so there mu are positive

lets assume that if we increase income x1* increases , X2* decreases

implies-
mu1(only function of x1) decreases but mu2(only function of x2) increases

which is not possible because thier ratio is fixed
this is a contradiction
so it must not happen that consumption of one good increases and other good decreases
this means consumption of both good should increase
implies all goods are normal in the above setup




 please tell me-    what do u think am i correct?


amit sir please give guidence on this problem

[Amit Goyal]

Hi Srawan,

Actually, there is nothing to solve in this problem:
Q.  A consumer consumes two goods, x1 and x2, with the following utility function
U(x1, x2) = U1(x1) + U2(x2). Suppose that the income elasticity is positive. It is claimed that in the
above set-up all goods are normal. Prove or disprove this claim.

A. Given that income elasticity of demand for all goods are positive i.e. (dx/dM)(M/x) > 0. This implies that dx/dM > 0. Hence, goods are normal.

[srawan]

sir ,  i thought this , but then my mind said -it should not be so simple(just one implication)
but now i know it is simple ,
thanks sir

[srawan]

7. A positive investment multiplier does not exist in an open economy
simple Keynesian model when the entire amount of investment goods
is supplied from import. Examine the validity of this statement.


my ans .-  i think ans-true
because if investment increases from i to 2i ,then extra investment is i ,due to this extra i demand increases by i ,but this all extra investment i is imported so this i is now income of a foreigner implies no change in domestic demand  due to income of foreigner (also no multiplier effect due to this income of foreigner) and also  this import i would reduce demand of domestic goods by i , so overall net demand change is 0  therefor multiplier is 0


amit sir please tell what is the validity of this statement
 is that statement true or false?