QURATULAIN RIYADH
STUDENT ID 11440
Section B
1.False
Currencies are at parity when the exchange rate relationship is exactly one to one. Companies based in the
United States that have operations in foreign countries must convert U.S. dollars into other currencies. ...
If the exchange rate is $1 to €1, the currencies are at parity.
2.FALSE
Flexible exchange rate system can be defined as exchange rates determined by global supply and demand
of currency. In other words, they are prices of foreign exchange determined by the market, that can
rapidly change due to supply and demand, and are not pegged nor controlled by central banks.
3. TRUE
Because the government has influence over several of the components of aggregate demand, it has the
power to shift AD through its policy choices. The aggregate demand curve shifts to the right as the
components of aggregate demand—consumption spending, investment spending, government spending,
and spending on exports minus imports—rise. The AD curve will shift back to the left as these
components fall.
Tax policy can affect consumption and investment spending as well.
4. FALSE
Stagflation is a period of rising inflation but falling output and rising unemployment. Stagflation is often
caused by a rise in the price of commodities, such as oil.
5. TRUE
Monetary policy is an economic policy that manages the size and growth rate of the money supply in an
economy. It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment.
These policies are implemented through different tools, including the adjustment of the interest rates,
purchase or sale of government securities, and changing the amount of cash circulating in the
economy. The central bank or a similar regulatory organization is responsible for formulating these
policies.
6.FALSE
It does not only enable us to study international economy it is the branch
of economics that studies the economy.
Sec C 1
The guiding principle of State bank of Pakistan is that it should act in the public interest and for the
welfare of the country without regard to profit as a primary Consideration. It is a bank, which is
responsible for the financial and economic stability of the country. Therefore, government authorized it to
formulate and implement the economic policies monetary policy & fiscal policy, issue currency notes and
store foreign reserves. Central bank of Pakistan name is state bank of Pakistan.
FUNCTIONS FOR GOVERNMENT As a government bank the state bank of Pakistan performs the
following functions.
1. MONOPOLY OF NOTE ISSUE: The most important function of the state bank of Pakistan is issuance
of currency notes. It has monopoly over issuance of currency note.
2. CONTROLLER OF CREDIT: The State bank of Pakistan controls and regulates credit money in the
country in order to the requirement of the economy. Credit money expansion or contraction has direct
relation with inflation or deflation.
3. CUSTODIAN OF FOREIGN EXCHANGE: Every country earns foreign exchange through exports of
goods and services. This earned and other foreign exchange is held in the custody of the state bank of
Pakistan.
4. ISSUANCE AND MANAGEMENT OF PUBLIC DEBTS: When the government needed public debts,
the state bank of Pakistan, on behalf of it, manages its issuance, payment of interests, & retirement
(returns the principal amount on maturity)
5. DEVELOPMENT OF THE FINANCIAL INSTITUTIONS: The state bank of Pakistan is responsible
to develop financial institutions in the country, which play a vital role in industrial, agricultures, and
capital development of the country, It also facilitates the establishment and running of money markets and
stock of exchange.
Sec C 2
Money supply
Quantity of money circulating in the economy at a particular time. Many countries commonly use it as an
indicator of economic performance. However, in our financial system, money is not limited to cash
anymore. There are several other physical and intangible assets that perform many or all of the functions
of money. Thus, depending on the scope we chose, the money supply can be larger or smaller. Therefore,
most countries distinguish between at least three measures of money supply, M1, M2, and M3.
M1 – Narrow Measure.M1 includes all currency (i.e., cash) in circulation, traveler’s checks, demand
deposits at commercial banks (or other depository institutions) held by the public, and other checkable
deposits. It is often referred to as the narrowest measure of money supply or narrow money
M2 – Intermediate Measure
M2 includes everything in M1 as well as savings deposits, time deposits below USD 100,000, and
balances in retail money market funds. It is often referred to as an intermediate measure because it is
broader than M1 but not quite as broad as M3.
It is also reported weekly and monthly by the Federal Reserve. M2 plays an essential role in any
discussion about money supply because it often provides more comprehensive insights than M1 alone.
Many economic activities include transactions between different types of accounts, which is only partially
included in M1
M3 – Broad Measure
M3 includes everything in M2 as well as time deposits larger than USD 100,000, balances in institutional
money market funds, and term repurchase agreements. It is considered the broadest measure of the money
supply. Again, for clarification, it should be noted that some countries (e.g., UK) report M4, a similar, but
not quite identical measure to M3.
Section C 3
1. Effect of change in current income on consumption and saving
Consumption increases as current income increases, and the larger the marginal propensity to consume,
the more sensitive current spending is to current disposable income. The smaller the marginal propensity
to consume, the stronger is the consumption-smoothing effect.
(i) There is direct relationship between income and saving, i.e., if income increases, saving also increases
but by less than increase in income. It means as income increases, proportion of income saved increases
(because proportion of income consumed decreases). (ii) At lower level of income, saving is negative.
2. Effect of change in expected future income on consumption and saving
When the consumer gets an increase in expected future income, again both current and future
consumption increase. Since current income does not increase, but
current consumption does, saving decreases. When the consumer gets an increase in wealth, both current
and future consumption again rise.
3. Effect of change in wealth on consumption and saving
The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their
assets rise. The idea is that consumers feel more financially secure and confident about their wealth when
their homes or investment portfolios increase in value.
4. Effect of change in real interest rate on consumption and saving
An increase in interest rates may lead consumers to increase savings since they can receive higher rates
of return. This is outlined in the marginal propensity to save. ... The other side of marginal propensity to
save is marginal propensity to consume, which shows how much a change in income affects purchasing
levels
5. Effect of change in tax on consumption and saving
The net effect (to begin with) is to reduce national savings by an amount equal to the marginal propensity
to consume. If the tax cut succeeds in increasing income, there is additional savings resulting from the
multiplier process. Still, we expect the overall effect is a decrease in national savings.
Taxation reduces the purchasing power of the people and it reduces their consumption. The decline
in consumption leads to decrease in effective demand for the goods and services, which in turn affects the
production of these commodities.
SECTION D GRAPH ONE
Short-Run Economic Fluctuations ARE COMMON IN every country. There are three Facts about
Economic Fluctuations. 1: Short-Run Economic Fluctuations are consistently lopsided and furthermore
generally indeterminable. Variances in the economy are typically called the business cycle where it is
equivalents to the progressions in business condition. The use of the term business cycle is lead off track
since it says that Economic Fluctuations follow unsurprising model. Tragically, Economic Fluctuations
are not steady. Second, most macroeconomic amounts, they vacillate together because most of the
macroeconomic factors that action out some sort of acquiring or creation vary close together. On the off
chance that the macroeconomic factors change together, they vacillate with variation amount. For
instance, if the economy is deteriorating, they will decrease the measure of expenditure in houses,
inventories, and their requests.
Then, the other key-reality about the Economic Fluctuation is, as the yield drops, the joblessness rate will
increase. For instance, if the organizations are deducting their creation on delivering more labor and
products to creating more modest amount of labor and products, they will ultimately lay off their laborers
to remove their spending. Hence, the joblessness rate will increase. The underneath diagram shows the
joblessness pace of a country.
GRAPH 2
Determining the supply and demand for a good or services provides a model of price determination in a
market. In a competitive market, the unit price for a good will vary until it settles at a point where the
quantity demanded equals the quantity supplied. The result is the economic equilibrium for that good or
service.
Equilibrium is the price -quantity pair where the quantity demanded is equal to the quantity supplied.
In the long run, increases in aggregate demand cause the output and price of a good or service to increase.
In the long run, the aggregate supply is affected only by capital, labor, and technology.
The aggregate supply determines the extent to which the aggregate demand increases the output and
prices of a good or service.
If quantity demand increases and supply remains unchanged, a shortage occurs, leading to a higher price
until the quantity demanded is pushed back to equilibrium.
If quantity demand decreases and supply remains unchanged, a surplus occurs, leading to a lower price
until the quantity demanded is pushed back to equilibrium.
If quantity demand remains unchanged and supply increases, a surplus occurs, leading to a lower price
until the quantity supplied is pushed back to equilibrium.
If quantity demand remains unchanged and supply decreases, a shortage occurs, leading to a higher price
until the quantity supplied is pushed back to equilibrium.
Graph 3
This is a long run supply aggregate supply curve
This pictures shows the relationship between price level and real GDP that would be supplied if all
prices, including nominal wages, were fully flexible; price can change along the LRAS, but output cannot
because that output reflects the full employment output.
Any change in the economy that alters the natural rate of output shifts the long run aggregate-supply
curve.
The shifts may be categorized according to the various factors in the classical model that affect output
Shifts arising from Labor , capital , natural resources and also technology knowledge.
1 in long run technologies progress shifts long run aggregate supply
section E
Prices
Good A
Good B
good C
2015
7
15
25
2016
14
18
30
2017
10
20
28
Quantities
Good A
Good B
good C
2000
150
250
350
2010
175
275
375
2021
200
300
400
CPI FOR 2015
SUM
1050
3750
8750
13550
13550*100/13550
Cpi 100
CPI fot 2016
sum
Cpi for 2017
Sum
2100
4500
10500
17100
17100*100/13550
Cpi.126.1993
1500
5000
9800
16300
16300*100/13550
Cpi.120.2952
Therefore, the price index are as follows for each year:
CPI FOR 2015=100
CPI FOR2016=126.1993
CPI FOR 2017=120.2952
Section F:
QUESTION 1
Problem faced by Govt in last year .
ECONOMIC GROWTH
The economy has been unwinding at such a dazing speed that even prepared foundations and people can't
precisely assess the degree to which the pandemic will affect development. In the main seven day stretch
of March, the Asian Development Bank concocted a number that appeared to be garbled with the
desperate forecasts being made all throughout the planet.
As indicated by the ADB, Pakistan's economy would lose around US$ 16 million in the most ideal
situation and around US$ 61 million in the direst outcome imaginable. In case of a critical flare-up of
COVID-19, the misfortune would add up to around US$ 5 billion, the GDP would shrink by 1.57 percent,
and almost 1,000,000 individuals would lose their positions. By the third seven day stretch of March, the
ADB had radically reexamined its evaluations to a US$ 415 million misfortune in the most ideal situation,
and a US $6.6–17 billion misfortune if there should be an occurrence of critical episode, with the
deficiency of work going from 1.2 million to 3.2 million positions and the GDP development shrinking
by two to five percent.
The poverty and unemployment estimates by the Pakistan Institute of Development Economics (PIDE)
are dire. In a series of bulletin published on the likely impact of COVID-19, the PIDE presented four
possibilities.
3. Foreign Trade and Balance of Payments
trade disruptions caused by COVID-19 and its impact on Pakistan’s GDP had worked out a worst-case
scenario in which there would be a 20 percent decline in exports and imports. Almost 70 percent of
Pakistan’s imports constitute raw materials, intermediate goods, and capital goods; around 60 percent of
exports are textiles, which depend heavily on imported raw materials. Therefore, a decline in imports will,
in turn, affect both exports and growth. By the PIDE’s calculations, a trade disruption of 20 percent would
lead to a GDP contraction of 4.6 percent in the last quarter of FY20.
4. Fiscal Balance and Revenue
Second, most macroeconomic amounts, they vacillate together because most of the macroeconomic
factors that action out some sort of acquiring or creation vary close together. On the off chance that the
macroeconomic factors change together, they vacillate with variation amount. For instance, if the
economy is deteriorating, they will decrease the measure of expenditure in houses, inventories, and their
requests.
5. Trade, Industry and Business
The latest data by the Pakistan Bureau of Statistics reveals that large scale manufacturing (LSM), which
accounts for nearly 80 percent of total manufacturing and around 11 percent of the GDP, has shown a
negative three percent growth in the first seven months of FY20. The petroleum sector has witnessed
the steepest decline of around 14 percent.
6 Debt
Pakistan’s public finances were already in a parlous state. The COVID-19 crisis has made it even more
difficult for Pakistan to service its mountain of debt. In FY19, the net revenue of the Federal government
was less than the debt servicing incurred by the government i.e. much of the government’s expenditure
was incurred through debt. In the 18 months since the previous PMLN government demitted office,
Pakistan’s total debt and liabilities have gone from PKR 30 trillion to PKR 41 trillion. The Central
government’s debt increased by over five percent in the first eight months of FY20, and
PART B QUESTION 2
Measures to mitigate the effects of COVID on economy
This crisis calls for more attention of the
government towards SME sector as Pakistan’s economy is mainly driven by the SME sector
Likewise, The French government aims to support startups through liquidity plan which is based on
short-term refinancing scheme, accelerated payment, tax credits and guarantees over cash
flow costs to deal with the COVID-19 impact. The German government is passing an
emergency supplementary budget for 2020 through which direct grants to those small
businesses and self-employed.
Following immediate measures are required. Supportive macroeconomic policies are required in this
emergency to reinstate
confidence and demand recovery. Tax credit for businesses should be provided so that they may provide
the salaries to
workers. Interest-free loans to businesses can be useful to cope with lost revenue
situation.
Despite negative spillovers, there are opportunities for few sectors such as health care
industry which can produce bulk quantities of masks, hand sanitizers and other basic
Online retail shopping may grow considering which resources can be shifted towards ePakistan can take advantage of the slowdown of trade flow among China, US and EU in
textile sector and can grasp some of the low hanging fruits in textile and apparels.