Q-1
Price and Quantities
Year
Price of Burgers
Quantity of Burgers
Price of Pizza Quantity of Pizza
2005
25
100
40
50
2006
30
150
55
100
2007
40
200
70
150
1.
Calculate the Nominal GDP for each year (2005, 2006, 2007).
2.
What is the percentage increase in Nominal GDP from 2005 to 2006?
3.
What is the percentage increase in Nominal GDP from 2006 to 2007?
4.
Calculate the Real GDP for each year using 2005 as the base year.
5.
What is the percentage change in Real GDP from 2005 to 2006?
6.
What is the percentage change in Real GDP from 2006 to 2007?
7.
Compute the GDP deflator for each year.
8.
What is the inflation rate between 2005 and 2006, using the GDP deflator?
9.
What is the inflation rate between 2006 and 2007, using the GDP deflator?
10.
GDP is often used to assess the economic performance of a country, but it may not fully capture
the well-being of its citizens." Discuss to what extent GDP is a good measure of well-being. What are its
limitations, and what alternative indicators could be used to assess societal progress more accurately?
Ans:
1. Nominal GDP (Current Prices)
•
2005: 4,500
•
2006: 10,000
•
2007: 18,500
2. Percentage Increase in Nominal GDP (2005–2006):
•
122.22%
3. Percentage Increase in Nominal GDP (2006–2007):
•
85.00%
4. Real GDP (Using 2005 Prices)
•
2005: 4,500
•
2006: 7,750
•
2007: 11,000
5. Percentage Change in Real GDP (2005–2006):
•
72.22%
6. Percentage Change in Real GDP (2006–2007):
•
41.94%
7. GDP Deflator (Nominal GDP / Real GDP × 100)
•
2005: 100.0
•
2006: 129.03
•
2007: 168.18
8. Inflation Rate (2005–2006) using GDP Deflator:
•
29.03%
9. Inflation Rate (2006–2007) using GDP Deflator:
•
30.34%
10. Is GDP a Good Measure of Well-being?
Strengths of GDP as a measure:
•
Provides a broad overview of a country’s economic activity.
•
Useful for comparing economic performance over time or between countries.
•
Often correlates with improvements in infrastructure, education, and healthcare.
Limitations of GDP:
•
Ignores income distribution — it doesn't show how wealth is shared.
•
Excludes non-market activities like household work or volunteer services.
•
Doesn’t account for environmental degradation caused by economic activity.
•
Misses well-being factors such as leisure time, mental health, and life satisfaction.
Alternative Indicators:
•
Human Development Index (HDI): Includes life expectancy, education, and income.
•
Genuine Progress Indicator (GPI): Adjusts GDP by factoring in social and environmental
costs.
•
Happiness Index / World Happiness Report: Measures subjective well-being.
•
Green GDP: Adjusts for environmental losses and resource depletion.
Q-2
a.
What are the two main tools that governments use to stabilize macroeconomic parameters?
b.
Define monetary policy and state which institution implements it in Bangladesh.
c.
Define fiscal policy and identify which bodies (or ministries) are responsible for it in
Bangladesh.
d.
What are the primary aims of monetary policy in Bangladesh?
e.
How effective has monetary policy been in controlling inflation or ensuring growth in recent
years?
f.
What are the goals of fiscal policy in Bangladesh, particularly in terms of development and public
welfare?
g.
What challenges does Bangladesh face in implementing effective fiscal policy (e.g., tax
collection, public debt)?
h.
How can an increase or decrease in interest rates affect household consumption and saving
behavior?
i.
How might a change in income tax rates influence disposable income and spending habits?
j.
In what ways do businesses respond to changes in monetary policy, such as adjustments in the
repo rate or money supply?
k.
How does fiscal expansion (e.g., increased public spending) impact the business sector?
l.
How do financial markets react to monetary tightening or easing (e.g., changes in liquidity, bond
yields)?
m.
What might be the effect of a fiscal deficit on interest rates and private investment?
n.
How can coordinate monetary and fiscal policies support economic recovery during a downturn?
Ans:
a. What are the two main tools that governments use to stabilize macroeconomic parameters?
•
Monetary policy and fiscal policy are the two key tools used to stabilize the economy, including
inflation, unemployment, and GDP growth.
b. Define monetary policy and state which institution implements it in Bangladesh.
•
Monetary policy involves the control of money supply and interest rates to influence economic
activity.
•
In Bangladesh, it is implemented by the Bangladesh Bank (the central bank).
c. Define fiscal policy and identify which bodies are responsible for it in Bangladesh.
•
Fiscal policy refers to the government's use of taxation and public spending to influence the
economy.
•
In Bangladesh, it is primarily handled by:
o
Ministry of Finance
o
National Board of Revenue (NBR)
o
Planning Commission
d. What are the primary aims of monetary policy in Bangladesh?
•
Maintaining price stability (controlling inflation)
•
Ensuring monetary and financial stability
•
Supporting economic growth
•
Stabilizing the exchange rate
•
Promoting inclusive finance
e. How effective has monetary policy been in controlling inflation or ensuring growth in recent
years?
•
Moderately effective: While monetary policy has helped contain inflation within target bands
most years, external shocks (like global commodity prices) and domestic liquidity pressures
have sometimes limited its effectiveness.
•
Growth support was partially successful, though impacted by COVID-19, energy crises, and
global slowdowns.
f. What are the goals of fiscal policy in Bangladesh, particularly in terms of development and public
welfare?
•
Financing infrastructure projects
•
Promoting social safety nets and poverty reduction
•
Enhancing human capital through investments in health and education
•
Ensuring regional balance and inclusive growth
•
Maintaining fiscal discipline
g. What challenges does Bangladesh face in implementing effective fiscal policy?
•
Low tax-to-GDP ratio
•
Tax evasion and narrow tax base
•
Inefficient public spending
•
Rising public debt and fiscal deficit
•
Limited budget transparency and accountability
h. How can an increase or decrease in interest rates affect household consumption and saving
behavior?
•
Higher interest rates encourage saving (better returns) and discourage consumption (costlier
loans).
•
Lower interest rates do the opposite—stimulating consumption and investment by reducing
the cost of borrowing.
i. How might a change in income tax rates influence disposable income and spending habits?
•
Lower income tax rates increase disposable income, encouraging higher spending.
•
Higher tax rates reduce disposable income, potentially lowering consumer demand.
j. In what ways do businesses respond to changes in monetary policy (e.g., repo rate or money
supply)?
•
Lower repo rates and increased money supply reduce borrowing costs, leading to higher
investment and expansion.
•
Tightening policy increases costs and can lead to reduced hiring, delayed investments, or
inventory cuts.
k. How does fiscal expansion (e.g., increased public spending) impact the business sector?
•
Boosts aggregate demand, creating opportunities for businesses.
•
Infrastructure and public projects provide contracts and jobs, stimulating sectors like
construction, transport, and materials.
l. How do financial markets react to monetary tightening or easing?
•
•
Tightening (higher interest rates):
o
Lowers liquidity
o
Raises bond yields, lowers bond prices
o
May reduce stock prices due to higher discount rates
Easing (lower rates):
o
Boosts liquidity
o
Lowers yields, raises bond and stock prices
o
Encourages risk-taking
m. What might be the effect of a fiscal deficit on interest rates and private investment?
•
A large deficit can lead to higher interest rates (crowding out effect) as the government
competes for funds, potentially reducing private investment.
n. How can coordinated monetary and fiscal policies support economic recovery during a
downturn?
•
Coordinated approach:
o
Fiscal policy can increase spending and reduce taxes to stimulate demand.
o
Monetary policy can lower interest rates to encourage borrowing and investing.
•
Together, they can revive confidence, boost employment, and promote sustainable recovery.
Q-3
1.
Define Total Fixed Cost (TFC) with an example.
2.
Define Total Variable Cost (TVC) with an example.
3.
What is Average Cost (AC) and how is it calculated?
4.
Define Marginal Cost (MC).
5.
What is meant by Explicit Cost? Provide an example.
6.
What is an Implicit Cost? Provide an example.
7.
What do you understand by the cost of production for a firm?
Explain with examples how it influences business decision-making.
8.
Distinguish between the following cost concepts using examples:
a) Total Fixed Cost (TFC) vs Total Variable Cost (TVC)
b) Average Cost (AC) vs Marginal Cost (MC)
c) Explicit Cost vs Implicit Cost
9.
Draw a diagram showing the AC and MC curves. Clearly label the point where MC intersects AC
and explain its significance.
10.
Explain the relationship between Average Cost and Marginal Cost.
Why does MC intersect AC at its minimum point? Support your answer with logic and a diagram.
Ans:
. Define Total Fixed Cost (TFC) with an example.
•
Definition: Total Fixed Cost is the cost that does not change with the level of output produced.
•
Example: A factory's monthly rent of 50,000 BDT remains the same whether it produces 100 or
1,000 units.
2. Define Total Variable Cost (TVC) with an example.
•
Definition: Total Variable Cost changes with the level of output.
•
Example: If it costs 10 BDT to produce one unit, then for 100 units, the TVC = 10 × 100 = 1,000
BDT.
3. What is Average Cost (AC) and how is it calculated?
•
Definition: Average Cost is the cost per unit of output.
•
Formula:
AC=Total Cost (TC)Quantity (Q)=TFC+TVCQAC = \frac{\text{Total Cost (TC)}}{\text{Quantity (Q)}}
= \frac{TFC + TVC}{Q}AC=Quantity (Q)Total Cost (TC)=QTFC+TVC
4. Define Marginal Cost (MC).
•
Definition: Marginal Cost is the additional cost incurred to produce one more unit of output.
•
Formula:
MC=ΔTCΔQMC = \frac{\Delta TC}{\Delta Q}MC=ΔQΔTC
5. What is meant by Explicit Cost? Provide an example.
•
Definition: Explicit costs are direct, out-of-pocket payments for inputs to production.
•
Example: Paying wages, raw materials, or electricity bills.
6. What is an Implicit Cost? Provide an example.
•
Definition: Implicit costs are the opportunity costs of using resources owned by the firm.
•
Example: An entrepreneur not taking salary to run their own business—the foregone income is
an implicit cost.
7. What do you understand by the cost of production for a firm?
•
Cost of Production is the total expense incurred in producing goods or services, including both
explicit and implicit costs.
Example and Influence:
•
If raw material costs increase, TVC rises, affecting pricing and profit.
•
Firms may decide to scale down production or shift to automation to manage costs.
8. Distinguish Between the Following Cost Concepts:
a) TFC vs TVC:
TFC
TVC
Fixed regardless of output Varies with output
TFC
TVC
Rent, salaries
Raw materials, electricity
b) AC vs MC:
| AC | MC |
| Cost per unit | Cost of next unit |
| Averages all units | Focuses on one additional unit |
| AC = TC/Q | MC = ΔTC / ΔQ |
c) Explicit vs Implicit Cost:
| Explicit | Implicit |
| Actual payment | Opportunity cost |
| Wages, rent | Forgone salary or rent |
9. Diagram of AC and MC Curves:
Here's a description:
•
The AC curve is U-shaped.
•
The MC curve also U-shaped and intersects the AC curve at its minimum point.
Significance:
•
When MC < AC, the AC falls.
•
When MC > AC, the AC rises.
•
Therefore, MC intersects AC at its minimum point.
10. Explain the Relationship Between AC and MC:
•
If MC < AC, it pulls AC down.
•
If MC > AC, it pushes AC up.
•
Therefore, MC = AC at the minimum point of the AC curve.
Logic:
Just like a student's average score:
•
If the next score is below average, the average falls.
•
If it's above average, the average rises.
•
If it's equal, the average remains unchanged.
Q-4
Price per kg (BDT)
150
1000
200
200
800
300
250
600
400
275
500
500
300
400
600
350
200
700
Quantity Demanded (kg)
Quantity Supplied (kg)
1) Plot the demand and supply curves on a graph using the data provided in the table.
2) Identify the equilibrium price and quantity—the point where quantity demanded equals quantity
supplied.
3) Suppose the market price is above the equilibrium price (e.g., Tk. 200 or Tk. 250).
a.
What economic condition exists in the market?
b.
What will happen to the quantity supplied and quantity demanded?
c.
How will the market respond to return to equilibrium?
4) Suppose the market price is below the equilibrium price (e.g., Tk. 300 or Tk. 350).
a.
What condition arises in the market?
b.
How will buyers and sellers behave in this situation?
c.
What forces will drive the price back toward equilibrium?
Ans:
1-
2The equilibrium price and equilibrium quantity occur where the quantity demanded equals the
quantity supplied.
From the table:
Price (BDT) Quantity Demanded (kg) Quantity Supplied (kg)
275
500
500
✅ Equilibrium Price = Tk. 275
✅ Equilibrium Quantity = 500 kg
This is the point where the market is balanced—there is no surplus or shortage.
3-
a. What economic condition exists in the market?
A surplus (excess supply) exists.
At higher prices, producers are willing to supply more than consumers are willing to buy.
b. What will happen to the quantity supplied and quantity demanded?
•
At Tk. 300:
o Quantity demanded = 400 kg
o
o
•
Quantity supplied = 600 kg
Surplus = 200 kg
At Tk. 350:
o Quantity demanded = 200 kg
o Quantity supplied = 700 kg
o Surplus = 500 kg
So, quantity supplied > quantity demanded, creating a buildup of unsold goods.
c. How will the market respond to return to equilibrium?
✅ To eliminate the surplus, producers will lower the price to attract more buyers.
✅ As price decreases:
•
•
Quantity demanded increases (consumers buy more).
Quantity supplied decreases (producers supply less).
This movement continues until the price reaches Tk. 275, the equilibrium, where quantity
demanded equals quantity supplied at 500 kg.
4a. What condition arises in the market?
A shortage (excess demand) arises.
At lower prices, consumers want to buy more than producers are willing to supply.
b. How will buyers and sellers behave in this situation?
•
•
Buyers (Consumers):
o Demand more of the product because it’s cheaper.
o Compete with each other, possibly driving up the price.
Sellers (Producers):
o Reluctant to supply large quantities at low prices.
o May raise prices due to strong demand and low stock.
For example:
•
At Tk. 150:
o Quantity demanded = 1000 kg
o
o
•
Quantity supplied = 200 kg
Shortage = 800 kg
At Tk. 200:
o Quantity demanded = 800 kg
o Quantity supplied = 300 kg
o Shortage = 500 kg
c. What forces will drive the price back toward equilibrium?
✅ Due to the shortage:
•
•
Buyers are willing to pay more to secure the product.
Sellers realize they can charge higher prices.
✅ This causes prices to rise.
As prices rise:
•
•
Quantity demanded falls.
Quantity supplied increases.
This adjustment continues until the market reaches the equilibrium price of Tk. 275, where
quantity demanded equals quantity supplied at 500 kg, and the shortage disappears.