Economics doubt P3 and P4, post it all in here!

[David Hussey]

As the question specified loanable funds theory, we now know that we would have to write about Monetarist views.
You could start off by:
According to Monetarist loanable funds theory, the interest rate is determined by the intersection of demand for money curve and the supply of money curve. The demand for money curve shows the attitude of the investors towards obtaining loans. In case if the interest rate is high, the investors would be reluctant to obtain loans because of the fact that the cost of borrowing would be higher but if the interest rate is lower, the demand for loans would increases as because cost of borrowing would fall. In case of supply curve, it shows the attitude of the savers. In case, when the interest rate is high, the savers would be more willing to deposit their cash to obtain higher rate of return, however, in case if the interest rate is low, the supply of money would fall as the savers would be reluctant to save money as the rate of return would be lower.

You could draw the diagram then and explain it.

btw shouldnt it be intersection of demand for loanable funds and supply of loanable funds? or is it the same thing as money?

 

[David Hussey]

Explain what multiplier effect is and what happens when government autonomous expenditure increases.
View attachment 43755
Government increases the money supply from q1 to q2, due to this, the interest rate falls. As we can see in the 1st diagram. According to lonable funds theory, a fall in interest rate would mean that there would be an increase in demand for capital. The investors would be willing to obtain bank loans because the cost of borrowing is low. Now what happens is that out of all Factor of production, the demand for capital increases. Due to this, more and more capital is employed by the firms in the short-run and therefore, the MEC (marginal efficiency of capital) curve is downwards sloping because producers only increase capital as a factor of mix and not labour or land etc. According to law of diminishing returns, after some time, the efficiency obtained from marginal capital falls but the rate of investments increases.
Therefore as the investments increases, more jobs are available to individuals. As a result of which, the national income of the economy increases. As the national income increases, aggregate demand increases. Due to which, economy experiences increase in GDP at the cost of inflation (Demand pull) in the society.

Draw this diagram

y are they increasing the money supply in the first place?

 

[SalmanPakRocks]

btw shouldnt it be intersection of demand for loanable funds and supply of loanable funds? or is it the same thing as money?

They are the same things bro, just classified that way because as to differentiate between Keynes and Monetarist.

 

[David Hussey]

oh right!

 

[SalmanPakRocks]

y are they increasing the money supply in the first place?

To undertake government expenditure. To invest somewhere, the government would need money, therefore they'd have to increase the supply of money because for that project, government would take money out of public treasury and inject it into the economy. Therefore money supply increases.

 

[SalmanPakRocks]

so we just have to write about the loanable funds theory, should we write briefly about the liquidity preference theory as well?
13 marks just for loanable funds,

You could explain about that as well but the question mentions loanable funds theory. Can you tell me which year this question is from?

 

[David Hussey]

lol i never even thought of that

 

[David Hussey]

You could explain about that as well but the question mentions loanable funds theory. Can you tell me which year this question is from?

its in the guess paper by Sir Qamar

 

[David Hussey]

t

To undertake government expenditure. To invest somewhere, the government would need money, therefore they'd have to increase the supply of money because for that project, government would take money out of public treasury and inject it into the economy. Therefore money supply increases.

they can also take from commercial and central banks right?

 

[SalmanPakRocks]

t

they can also take from commercial and central banks right?

Yup, but in either case, money would be injected into the economy so the money supply would increase.

 

[David Hussey]

Explain what multiplier effect is and what happens when government autonomous expenditure increases.
View attachment 43755
Government increases the money supply from q1 to q2, due to this, the interest rate falls. As we can see in the 1st diagram. According to lonable funds theory, a fall in interest rate would mean that there would be an increase in demand for capital. The investors would be willing to obtain bank loans because the cost of borrowing is low. Now what happens is that out of all Factor of production, the demand for capital increases. Due to this, more and more capital is employed by the firms in the short-run and therefore, the MEC (marginal efficiency of capital) curve is downwards sloping because producers only increase capital as a factor of mix and not labour or land etc. According to law of diminishing returns, after some time, the efficiency obtained from marginal capital falls but the rate of investments increases.
Therefore as the investments increases, more jobs are available to individuals. As a result of which, the national income of the economy increases. As the national income increases, aggregate demand increases. Due to which, economy experiences increase in GDP at the cost of inflation (Demand pull) in the society.

Draw this diagram

for the 2nd diagram are the label axes correct, int rat and qty? or something else, cox u wrote I0 and I1
and 3rd diagram Ae should go up right? so i think u accidentally wrote the opposite

 

[SalmanPakRocks]

for the 2nd diagram are the label axes correct, int rat and qty? or something else, cox u wrote I0 and I1
and 3rd diagram Ae should go up right? so i think u accidentally wrote the opposite

Nope, I did it correctly.
I drew the A.E 2 just to show that the GDP increase is not the potential GDP. If we use GDP deflator formula, we'd know that the increase in the GDP is just due to inflationary effect.

 

[AlphaBeta]

Paradox of thrift is a situation where savings are done privately and not in Banks, as a result of this, leakage occurs in an economy which disrupts the circular flow of Income.
This is what my Sir told me, actually, there are some disagreements between Keynes economist and monetarist economist about paradox of thrift.

Paradox of value is rather simple, Adam Smith stated that water, which is more useful than diamond has lower value in exchange as compared to diamond. The reason for this is because the law of diminishing marginal utility works with full force in case of water, but in case of diamond, the marginal utility increases when gaining extra diamond. This is because water is abundantly available where as diamond is scarce in supply.

So paradox of thrift should be like working inverse multiplier , as savings in a leakage ryt ?
also for efficiency questions , can u draw a sample diagram of oligopoly and monopolistic competition, showing inefficiency
jazakallah

 

[SalmanPakRocks]

So paradox of thrift should be like working inverse multiplier , as savings in a leakage ryt ?
also for efficiency questions , can u draw a sample diagram of oligopoly and monopolistic competition, showing inefficiency
jazakallah

Yup.
Okay wait.

 

[SalmanPakRocks]

The basic drawback of oligopoly kinked demand curve is that it does not show how price is determined. Therefore, we cannot show efficiency related to oligopoly using kinked demand curve, for monopolistic competition, it's here.

Sorry, not so good with paint
q1 is MC=MR, profit maximazing level
q2 is allocatively efficient or growth maximization
q3 is productively efficient or pareto optimum level

 

[:: A^]

The basic drawback of oligopoly kinked demand curve is that it does not show how price is determined. Therefore, we cannot show efficiency related to oligopoly using kinked demand curve, for monopolistic competition, it's here.
View attachment 43844
Sorry, not so good with paint
q1 is MC=MR, profit maximazing level
q2 is productively efficient or growth maximization
q3 is allocatively efficient or pareto optimum level

Isnt this pretty much the same as a monopolys?

 

[Lostsoul]

May June 2008, Qstn 2. Marks: 25

 

[:: A^]

May June 2008, Qstn 2. Marks: 25View attachment 43850 View attachment 43849 View attachment 43847 View attachment 43846

I think this question doesnt require you to write about productiove efficiency.. Its concentrating more on allocative efficiency by charging a socially desirable price for the consumers where MR = MC. I would do the 6th and 7th question in that paper if i were you.
Also thats quite less for a 25 marks question.

 

[Lostsoul]

I think this question doesnt require you to write about productiove efficiency.. Its concentrating more on allocative efficiency by charging a socially desirable price for the consumers where MR = MC. I would do the 6th and 7th question in that paper if i were you.
Also thats quite less for a 25 marks question.

Owww.. actually I finished tgat topoc so thought of doing a topical question.. there is no much I could write for allocative efficiency so thays all I thought of... can you give me an oitline of it..

 

[:: A^]

Owww.. actually I finished tgat topoc so thought of doing a topical question.. there is no much I could write for allocative efficiency so thays all I thought of... can you give me an oitline of it..

First of all remember this. Just because they say something about allocative efficiency that does not mean you write everything about efficiency. Basically the first two pages of your answer was irrelevant. (i think ) This is the examiners trick and u just fell for it.. (Did not mean to sound rude )

Firstly u can explain about efficiency, probably around 1 page. MAXIMUM. (General Stuff)
Next page about allocative efficiency.
Stress on the fact that allocative efficiency occurs where MR = MC.
Then consider whether or not an electricity may actually operate this way? (Public Good?)
It may have other objectives. (Sales Maximisation?)
What if costs too high?
In that case, if the government is cross-subsidising this, it would not necessary be a problem if it doesnt cover costs.

This is just some of what i can think right now.

Surprisingly, this is what the examiner report says, and trust me, this is one of the best examiner comments on a question ive seen in a while..