Economics, Accounting & Business: Post your doubts here!

[Manesh]

ya sure.Anyways for those who may not know what I am talking about.Here's a kind of question which I don't understand-
http://www.xtremepapers.com/papers/CIE/Cambridge International A and AS Level/Economics (9708)/9708_w09_qp_31.pdf
Q17
answer is-B

this is done in this way, you rememeber Fischer's equation of exchange.
Expenditures (MV) are equal to nominal NI (PQ), if M rises with constant velocity then PQ will increase by the same %.
E.g. if M rises by 10% and real output (Q) increases by 4% then P must have increased by 6%.
MV (10%) = P(6%) Q(4%)
If Q rises by greater % than M, it means price level has fallen.
M(10%) * V = P(-2%) Q(12%).

in this case Q.17, V(velocity) is constant and M(money supply) has increased by 8% and on the other side P(price level) has increased by 5% so Q(quantity) should be increased by 3%.

 

[2pac]

this is done in this way, you rememeber Fischer's equation of exchange.
Expenditures (MV) are equal to nominal NI (PQ), if M rises with constant velocity then PQ will increase by the same %.
E.g. if M rises by 10% and real output (Q) increases by 4% then P must have increased by 6%.
MV (10%) = P(6%) Q(4%)
If Q rises by greater % than M, it means price level has fallen.
M(10%) * V = P(-2%) Q(12%).

in this case Q.17, V(velocity) is constant and M(money supply) has increased by 8% and on the other side P(price level) has increased by 5% so Q(quantity) should be increased by 3%.

Whoa!Thanks a lot.Seemed to have understand of it.

 

[Manesh]

Q2 the answer's C . I've got no idea how its done.
http://www.xtremepapers.com/papers/CIE/Cambridge International A and AS Level/Economics (9708)/9708_w03_qp_3.pdf

for utility maximisation marginal utility per $ should be same for all goods. it is calculated by dividing marginal utility with price.
in this case marginal utility per $ for food is 2 (10/5).
so for clothing it should be 2. you will calculate it in this way, M/0.50 = 2, 0.50 goes on the other side and is multiplied by 2 and you get M=1

 

[MnMz]

http://www.xtremepapers.com/papers/...d AS Level/Economics (9708)/9708_s08_qp_3.pdf

Q23?

 

[Anusuya]

Ah well i wasn't able to complete it either. Well i did give a reference of PEST analysis and said that even if we consider it, the data given only considers the economic factors. Explained them a little. Then i talked about other qualitative factors that can play a role, such as social factors etc. No quantitative factors were provided, such as the cost of land etc. So said that they play a key role so thay must also be considered. I was writing about Investment appraisal and breakeven analysis but wasn't able to complete it

Ohh my godd ! can you just explain what this ques. meant?? I just compared the given data...talked abt the quantitative fators present in the data..the labour cost. other quantitative factors like govt. incentives and land ost need to be realised. and market research should take place And suggested that qualtative factors like the laws of the country...env. where the school is supposed to be located, the level of tax to be paid...living standard of the country should also be measured. And I indirectly supported country A to be chosen. Bt i still did not get the question lol

And isnt the contribution 84000?? wat did u guys right?? should it shut down or continue operating??

 

[Anusuya]

I was hoping that CPA would come!

even i wished it would come atleast i knew it...and getting it right means...getting full marks. I just hate the long theoritical answers

 

[Saiyan]

Okay,better if we forget about business and concentrate on Eco.I had planned to start MCQS an hour ago but these discussions have just distracted me.So no more distraction from this point on,those doing eco mcqs,can any of you explain me how to do the quantity theory of money qs.Every paper has one question regarding that topic so if you could please explain it to me,I'd really appreciate it.
thanks

Monetarism and the Quantity Theory of Money

In this section we consider briefly the main principles of the monetarist theory of inflation and the role that monetary policy can play in stabilising prices and output in an economy.
The basics of monetarism
The key features of monetarist theory are as follows:

• The main cause of inflation is an excess supply of money leading to in the words of Monetarist Economist Milton Friedman, “too much money chasing too few goods”. We will see graphically how this can lead to a build up of inflationary pressure in an economy.
• Tight control of money and credit is required to maintain price stability
• Attempts by the government to use fiscal and monetary policy to “fine-tune” the rate of growth of aggregate demand are often costly and ineffective. Fiscal policy has a role to play in stabilising the economy providing that the government is successfully able to control its own borrowing.
• The key is for monetary policy to be credible – perhaps in the hands of an independent central bank – so that people’s expectations of inflation are controlled.

The Quantity Theory of Money
The Quantity Theory was first developed by Irving Fisher in the inter-war years as is a basic theoretical explanation for the link between money and the general price level. The quantity theory rests on what is sometimes known as the Fisher identity or the equation of exchange. This is an identity which relates total aggregate demand to the total value of output (GDP).
M x V = P x Y
Where

1. M is the money supply
2. V is the velocity of circulation of money
3. P is the general price level
4. Y is the real value of national output (i.e. real GDP)

The velocity of circulation represents the number of times that a unit of currency (for example a £10 note) is used in a given period of time when used as a medium of exchange to buy goods and services. The velocity of circulation can be calculated by dividing the money value of national output by the money supply.
In the basic theory of monetarism expressed using the equation of exchange, we assume that the velocity of circulation of money is predictable and therefore treated as a constant. We also make a working assumption that the real value of GDP is not influenced by monetary variables. For example the growth of a country’s productive capacity might be determined by the rate of productivity growth or an increase in the capital stock. We might therefore treat Y (real GDP) as a constant too.
If V and Y are treated as constants, then changes in the rate of growth of the money supply will equate to changes in the general price level. Monetarists believe that the direction of causation is from money to prices (as we saw in the flow chart on the previous page).
The experience of targeting the growth of the money supply as part of the monetarist experiment during the 1980s and early 1990s is that the velocity of circulation is not predictable – indeed it can suddenly change, partly as a result of changes to people’s behaviour in their handling of money. During the 1980s it was found that direct and predictable links between the growth of the money supply and the rate of inflation broke down. This eventually caused central banks in different countries to place less importance on the money supply as a target of monetary policy. Instead they switched to having exchange rate targets, and latterly they have become devotees of inflation targets as an anchor for the direction of monetary policy.

Just remember that MV=PT is another representation of national income, use this concept to solve the mcq. Inform me if you don't understand

 

[WaleedUQ]

Monetarism and the Quantity Theory of Money

In this section we consider briefly the main principles of the monetarist theory of inflation and the role that monetary policy can play in stabilising prices and output in an economy.
The basics of monetarism
The key features of monetarist theory are as follows:

• The main cause of inflation is an excess supply of money leading to in the words of Monetarist Economist Milton Friedman, “too much money chasing too few goods”. We will see graphically how this can lead to a build up of inflationary pressure in an economy.
• Tight control of money and credit is required to maintain price stability
• Attempts by the government to use fiscal and monetary policy to “fine-tune” the rate of growth of aggregate demand are often costly and ineffective. Fiscal policy has a role to play in stabilising the economy providing that the government is successfully able to control its own borrowing.
• The key is for monetary policy to be credible – perhaps in the hands of an independent central bank – so that people’s expectations of inflation are controlled.

The Quantity Theory of Money
The Quantity Theory was first developed by Irving Fisher in the inter-war years as is a basic theoretical explanation for the link between money and the general price level. The quantity theory rests on what is sometimes known as the Fisher identity or the equation of exchange. This is an identity which relates total aggregate demand to the total value of output (GDP).
M x V = P x Y
Where

1. M is the money supply
2. V is the velocity of circulation of money
3. P is the general price level
4. Y is the real value of national output (i.e. real GDP)

The velocity of circulation represents the number of times that a unit of currency (for example a £10 note) is used in a given period of time when used as a medium of exchange to buy goods and services. The velocity of circulation can be calculated by dividing the money value of national output by the money supply.
In the basic theory of monetarism expressed using the equation of exchange, we assume that the velocity of circulation of money is predictable and therefore treated as a constant. We also make a working assumption that the real value of GDP is not influenced by monetary variables. For example the growth of a country’s productive capacity might be determined by the rate of productivity growth or an increase in the capital stock. We might therefore treat Y (real GDP) as a constant too.
If V and Y are treated as constants, then changes in the rate of growth of the money supply will equate to changes in the general price level. Monetarists believe that the direction of causation is from money to prices (as we saw in the flow chart on the previous page).
The experience of targeting the growth of the money supply as part of the monetarist experiment during the 1980s and early 1990s is that the velocity of circulation is not predictable – indeed it can suddenly change, partly as a result of changes to people’s behaviour in their handling of money. During the 1980s it was found that direct and predictable links between the growth of the money supply and the rate of inflation broke down. This eventually caused central banks in different countries to place less importance on the money supply as a target of monetary policy. Instead they switched to having exchange rate targets, and latterly they have become devotees of inflation targets as an anchor for the direction of monetary policy.

Just remember that MV=PT is another representation of national income, use this concept to solve the mcq. Inform me if you don't understand

Just to Add more :
the formula for velocity is GDP\MS
T is the GDP which is fixed already..
the equation is not the used for the determination of national income perhaps used to determine what will be affect of changes in money supply to Price level ? Why cause the theory is evolved by the classicals ( monetarist ) who thinks that changes in money supply directly affect the general price level..

 

[Saiyan]

Aree listen i am in no mood to get abusive now because my bst paper today was good.
So you thank god you're lucky to stay outta humiliation.

Suppose your paper went terrible and then go on humiliating people? What is the meaning of this? You still did not learn your lesson. Just look at you! You have a dirty tongue and a stinky mind! This does not make you look cool does it? It rather degrades you.

Like who do you think you are mf jones of 'Horrible Bosses' ?
You better stay out of this thread!

 

[MnMz]

Could someone explain how to calculate multiplier?

 

[WaleedUQ]

Could someone explain how to calculate multiplier?

The formula for multiplier is
( 1 sector ) 1/mps ( two sector ) 1/mps + mpt 1/mps + mps + mp imports ( 4 sector )

 

[Saiyan]

http://www.xtremepapers.com/papers/CIE/Cambridge International A and AS Level/Economics (9708)/9708_s08_qp_3.pdf

Q23?

Okay, use the concept of credit multiplier here. Just divide 200 by 20% this will give you the total bank deposits. Out of the 1000 bank will be able to generate loans from 800 since 200 was provided by u. So deposit as a whole increase by 1000 and bank loan by 800.

 

[Manesh]

http://www.xtremepapers.com/papers/CIE/Cambridge International A and AS Level/Economics (9708)/9708_s08_qp_3.pdf

Q23?

they have to maintain 20% of deposits as cash, this means that they must have 20% of total deposits as cash.
so if 200 is 20% of total deposit then total deposits will be 1000 (200/0.2). so now from total deposit they need to keep 200 as cash reserve and remaining 800 they can give them in loans.

 

[Saad Ghori]

Ohh my godd ! can you just explain what this ques. meant?? I just compared the given data...talked abt the quantitative fators present in the data..the labour cost. other quantitative factors like govt. incentives and land ost need to be realised. and market research should take place And suggested that qualtative factors like the laws of the country...env. where the school is supposed to be located, the level of tax to be paid...living standard of the country should also be measured. And I indirectly supported country A to be chosen. Bt i still did not get the question lol

And isnt the contribution 84000?? wat did u guys right?? should it shut down or continue operating??

The question asked whether the data provided in appendix is enough to decide as to where the school should be located. We had to mention all the factors that you discussed. Tho you didn't mention that, no the data isn't enough, other factors need to be taken into consideration too. Bas you missed that sentence
And yes the contribution was 84000. But I said that it should be closed as it wasn't covering the fixed cost that was generated by its own building. So if it is closed down, it will actually be profitable.

 

[Saiyan]

MnMz
To make a summary of what Walled has attached- A multiplier exists whenever a change in one variable causes multiple and successive stages of change in a second variable. We all know that mpw are are the leakages in an economy and tends to reduce national income so if leakages are reduced due expansionary fiscal policy this will induce the AD. Note that all components of AD are set fixed (autonomous) so to ease the calculation. The only component which will vary is the consumption which increases due to the multiplier eg the tax multiplier.

 

[Anusuya]

The question asked whether the data provided in appendix is enough to decide as to where the school should be located. We had to mention all the factors that you discussed. Tho you didn't mention that, no the data isn't enough, other factors need to be taken into consideration too. Bas you missed that sentence
And yes the contribution was 84000. But I said that it should be closed as it wasn't covering the fixed cost that was generated by its own building. So if it is closed down, it will actually be profitable.

ya i mentioned that the factor isn't enough...n bla bla. And one of the genius fren of mine was saying to link this ans. with only inflation and the disposable income. I was dead scared. My ans. is correct ot some extent right?
Even I suggested to close down the school as it wasn't able to make profit for the past 6 years inspite of the positive contribution..n closing it meant the additional profit.

 

[MnMz]

MnMz
To make a summary of what Walled has attached- A multiplier exists whenever a change in one variable causes multiple and successive stages of change in a second variable. We all know that mpw are are the leakages in an economy and tends to reduce national income so if leakages are reduced due expansionary fiscal policy this will induce the AD. Note that all components of AD are set fixed (autonomous) so to ease the calculation. The only component which will vary is the consumption which increases due to the multiplier eg the tax multiplier.

so how do we apply it on this
http://www.xtremepapers.com/papers/... AS Level/Economics (9708)/9708_w11_qp_32.pdf
q18?

 

[Saiyan]

ya i mentioned that the factor isn't enough...n bla bla. And one of the genius fren of mine was saying to link this ans. with only inflation and the disposable income. I was dead scared. My ans. is correct ot some extent right?
Even I suggested to close down the school as it wasn't able to make profit for the past 6 years inspite of the positive contribution..n closing it meant the additional profit.

I will not agree to close the school. The reason is that even if the company will earn a profit of 436,000 but still you need to think about the stakeholders. Like the workers who are redundant, parents who have to search for a new school as well as the govt who may interfere in this closure as education is a merit good. There is an allocated overhead of 320,000 to be shared among the schools. Assured high school also share this overhead so if it get closed down the other schools have to bear that this may incur loss for other schools. But then again I wrote a two sided answer and justified my argument.

 

[Anusuya]

I will not agree to close the school. The reason is that even if the company will earn a profit of 436,000 but still you need to think about the stakeholders. Like the workers who are redundant, parents who have to search for a new school as well as the govt who may interfere in this closure as education is a merit good. There is an allocated overhead of 320,000 to be shared among the schools. Assured high school also share this overhead so if it get closed down the other schools have to bear that this may incur loss for other schools. But then again I wrote a two sided answer and justified my argument.

I even mentioned abt these factors and told that the redundancy payment can be given to the workers...and prior notice can be given to students for searching new schools.

 

[2pac]

Monetarism and the Quantity Theory of Money

In this section we consider briefly the main principles of the monetarist theory of inflation and the role that monetary policy can play in stabilising prices and output in an economy.
The basics of monetarism
The key features of monetarist theory are as follows:

• The main cause of inflation is an excess supply of money leading to in the words of Monetarist Economist Milton Friedman, “too much money chasing too few goods”. We will see graphically how this can lead to a build up of inflationary pressure in an economy.
• Tight control of money and credit is required to maintain price stability
• Attempts by the government to use fiscal and monetary policy to “fine-tune” the rate of growth of aggregate demand are often costly and ineffective. Fiscal policy has a role to play in stabilising the economy providing that the government is successfully able to control its own borrowing.
• The key is for monetary policy to be credible – perhaps in the hands of an independent central bank – so that people’s expectations of inflation are controlled.

The Quantity Theory of Money
The Quantity Theory was first developed by Irving Fisher in the inter-war years as is a basic theoretical explanation for the link between money and the general price level. The quantity theory rests on what is sometimes known as the Fisher identity or the equation of exchange. This is an identity which relates total aggregate demand to the total value of output (GDP).
M x V = P x Y
Where

1. M is the money supply
2. V is the velocity of circulation of money
3. P is the general price level
4. Y is the real value of national output (i.e. real GDP)

The velocity of circulation represents the number of times that a unit of currency (for example a £10 note) is used in a given period of time when used as a medium of exchange to buy goods and services. The velocity of circulation can be calculated by dividing the money value of national output by the money supply.
In the basic theory of monetarism expressed using the equation of exchange, we assume that the velocity of circulation of money is predictable and therefore treated as a constant. We also make a working assumption that the real value of GDP is not influenced by monetary variables. For example the growth of a country’s productive capacity might be determined by the rate of productivity growth or an increase in the capital stock. We might therefore treat Y (real GDP) as a constant too.
If V and Y are treated as constants, then changes in the rate of growth of the money supply will equate to changes in the general price level. Monetarists believe that the direction of causation is from money to prices (as we saw in the flow chart on the previous page).
The experience of targeting the growth of the money supply as part of the monetarist experiment during the 1980s and early 1990s is that the velocity of circulation is not predictable – indeed it can suddenly change, partly as a result of changes to people’s behaviour in their handling of money. During the 1980s it was found that direct and predictable links between the growth of the money supply and the rate of inflation broke down. This eventually caused central banks in different countries to place less importance on the money supply as a target of monetary policy. Instead they switched to having exchange rate targets, and latterly they have become devotees of inflation targets as an anchor for the direction of monetary policy.

Just remember that MV=PT is another representation of national income, use this concept to solve the mcq. Inform me if you don't understand

which site?