Question

Given: C = 250 + 0.8 Y (Marks: 7x5=35) I = 150
G = 300
TR = 100
NX = 100
t =0.25
i) Find the equilibrium level of income.
ii) Suppose, b 50, MPS falls to .05, I falls to 10, G falls to 100 and NX falls to 10. How much TR should the government increase to have the same level of equilibrium income as in part i)?
iii) In determining the required change in TR in part ii), which multiplier did you use and why? (Hint: keep in mind the consumption tendency households may have under the COVID 19 situation in selecting the multiplier).
iv) Draw a graph to show the appropriate changes between part i) and part ii).
v) Give an example related to current Bangladeshi situation where the government may follow a 'Transfer Promoting Policy' instead of a 'Growth Promoting Policy' in determining who gets the transfer payment (Chapter 17 of Arnold explains the difference between the two policies).
vi) Instead of paying transfer (TR) if the government were to increase government spending (G), what type of crowding out would you expect? Explain.
vii) As we have observed recently that, a lot of the assistance from the government is being misappropriated by dishonest individuals and as a result is not reaching the target population. What role can proper institution play to rectify such mishandling of government fund? Explain. (Role of institutions are discussed in Chapter 17 of Arnold)

Answer 1

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