Q.1    State True or False in the answer column. Give brief reason for your selection at the space           provided below the question.                                                                                            (20)
                                                                                                                                                 (Answer)

i	The external debt burden of Pakistan as percentage of GDP is continuously rising.
ii	An increase in real GDP indicates that there is an increase in the material well being of all individuals in the economy.
iii	A country which experiences net out flow of capital has a deficit balance in its capital account.
iv	Over longer period of time potential output shows a cyclical pattern where increases and decreases in output are of the same length and magnitude.
v	The amount of money held as a store of value is negatively related with interest rate.
vi	An equal increase in autonomous taxes and autonomous transfers has no effect upon equilibrium output.
vii	Changes in potential output in the short run are normally the result of increased capital resources.
viii	The liquidity effect is large when investment is interest sensitive.
ix	The increase in nominal money supply ceteris paribos, results in an increase in the real money supply.
x	When aggregate supply curve is constant, higher rates of inflation are accompanied by higher rates of unemployment.
xi	Treasury Bills are the short-term debt obligations issued by the Federal Government.
xii	The resident’s foreign currency deposits constitute the part of M1.
xiii	In case of Pakistan, the rule-based fiscal policy as compared to discretionary fiscal policy is not appropriate because it has an interest deficit bias.
xiv	The impact of a shift in the aggregate demand curve on prices and real output will depend upon the slope of the aggregate supply curve.
xv	If Marginal Propensity to save is equal to 1, the multiplier will also be equal to 1.
xvi	An increase in the world supply of oil would increase real gross domestic product (GDP) and the aggregate price level would tend to decline, if other things remain same?
xvii	If the government simultaneously engages in expansionary monetary and fiscal policies, interest rates will decrease?
xviii	If nominal gross domestic product fell while real gross domestic product rose, it suggests that the economy is facing hyperinflation.
xix	A rise in budget deficit as percent of GDP in 2005-06 relative to 2004-05 increased only due to earthquake related spending.
xx	Under expansionary fiscal policy in a developing economy, imports are likely to surge rapidly.

Q.2     Please write the alphabet of selected answer column:                                                    (20)
                                                                                                                                                   (Answer)

i	In case of Pakistan for FY 2005-2006, the highest contribution in commodity producing sector was made by: (A) Large scale manufacturing                 (B) Construction (C) Electricity & Gas Distribution            (D) Mining and Qarrying (E) None of the above
ii	The most widely used indicator of financial deeping in an economy is A) M1/M2                  B) M1/GDP            C) M2/GDP D) Demand Deposit/GDP                           E) Liquid Reserve/M2
iii	In Pakistan, privatization is used as an important economic reform policy tool aiming at: (A) Generating Growth                                (B) Reducing Fiscal Deficit (C) Reducing Structural Inefficiencies (D) Opening the Economy to Competition    (E) All the above
iv	An autonomous increase in saving: (A) is necessarily accompanied by an income in consumption spending (B) will shift the expenditure schedule (C) will not effect the level of income as neither the aggregate demand nor         aggregate supply curve will shift (D) shift the aggregate demand curve up (E) shift the aggregate supply curve up
v	Which of the following statements about the Lorenz Curve is false? (A) It is a graph of the cumulative percentage of families (or persons) and the        associated cumulative percentage of total income they receive (B) It has a positive slope (C) It would be a straight line if there was no economic discrimination (D) Gini coefficient, the aggregate inequality measure can be determined by it (E) Its downwards shifting would show a relatively more equitable distribution of       wealth
vi	Defining poor people as those who fall in the bottom 20% of the income distribution. (A) Is an absolute measure of poverty. (B) Is a relative measure of poverty. (C) Means continued economic growth will eliminate poverty. (D) Implies poverty gap will be large. (E) Means Gini coefficient is closer to zero.
vii	Which of the following is probably the most important factor explaining both low productivity and the productivity gap in Pakistan? (A) Lack of entrepreneurship                (B) Low rates of investment (C) Lack of Government sponsored industrial policy. (D) Lack of international competitiveness. (E) Low living standards.
viii	In an open economy when exchange rates are flexible, a decrease in taxes. (A) Would have no effect upon output. (B) Causes output to increase (C) Results in an increase in exports (D) Results in an increase in imports. (E) Results in a decrease in the value of its currency.
ix	When there is full employment and aggregate supply curve is positively sloped, an increase in Government spending: (A) Decrease output and price level        (B) Decrease output and real wage (C) Increase output and real wage          (D) Increase output and price level (E) None of the above.
x	Dis-inflationary demand management policies: (A) Achieve lower rate of inflation without causing a decrease in output. (B) Reduce output without having an initial effect on inflation rate. (C) Require an increase in Government spending. (D) Require a reduction in growth rate of normal money supply. (E) Reduce output but real wage increase.
xi	The liquidity effect occurs when: (A) A reduction in government spending lowers the rate of interest. (B) A money supply decrease lowers the interest rate. (C) A money supply increase lowers the interest rate. (D) An increase in government spending increases the rate of interest. (E) A money supply increase raises the interest rates.
xii	In a two sector model S = -40+0.20 Yd and investment is 60, the equilibrium output is: (A) 100       (B) 400            (C) 450        (D) 500           (E) 1000
xiii	The primary function of a financial system is : (A) Resource Allocation                    (B) Clear and settle payment (C) Accumulate and discriminate information (D) Provide ways to manage risk. (E) Provide wages for dealing with incentive problems.
xiv	The real rate of interest is determined by: (A) The Fisher equation (B) The interaction of returns to productive opportunities and individual fine        preferences for consumption. (C) The supply and demand of loanable funds (D) All the above             (E) B & C
xv	Suppose the nominal interest rate is fixed, an increase in expected inflation will cause: (A) An increase in real interest rate.           (B) A reduction in real interest rate (C) No change in real interest rate since nominal interest rate is fixed (D) A decrease in investment and a reduction in output (E) None of the above.
xvi	If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur? (A) Aggregate demand will be unchanged.    (B) Aggregate demand will increase. (C) Interest rates will decrease.                    (D) The money supply will decrease. (E) None of the above.
xvii	To counteract a recession, State Bank of Pakistan should (A) sell securities on the open market and raise the discount rate (B) sell securities on the open market and lower the discount rate (C) buy securities on the open market and raise the discount rate (D) buy securities on the open market and lower the discount rate (E) None of the above
xviii	If State Bank of Pakistan sells a significant amount of government securities in the open market, which of the following will occur? (A) The total amount of loans made by commercial banks will decrease. (B) The total amount of loans made by commercial banks will increase. (C) The money supply will increase. (D) Rates of interest will decrease. (E) None of the above.
xix	If the total reserve requirement is 25 percent and banks hold no excess reserves, an open market sale of Rs 4 billion of government securities by the State Bank of Pakistan will (A) increase the money supply by up to Rs.16 billion (B) decrease the money supply by up to Rs.16 billion (C) increase the money supply by up to Rs. 3 billion (D) increase the money supply by up to Rs.1 billion (E) None of the above
xx	The opportunity cost of holding currency is the (A) prices of goods and services       (B) cost of printing currency notes (C) level of wages and income          (D) interest rate on deposits (E) holding currency does not involve an opportunity cost

Q.3 (A) The extracts of a report are given hereunder :

“While there is a complete consensus among the economists and the businessmen on the fact that Pakistan’s rupee exchange parity is over-valued, there is a sharp difference of opinion when it comes to the issue of reviewing/re-adjusting or devaluation of national currency. There is a consensus that rupee parity is over-valued by atleast 10% because of the inflation differentials between Pakistan and its trading partners. Some economists are of the view that this over-valuation is causing stress on the external sector and the rupee should be gradually de-valued while others believe that any idea of devaluation recipe would de-stabilize the whole system as it will set in motion a new wave of unprecedented inflationary wave. Some think that devaluation alone is not the solution. It also requires some supportive steps by the Government such as to rein in mounting demand and growing consumption which is showing no sign of respite.”

i) Explain why Rupee is considered over-valued. How is it going to effect Pakistans’ external sector. (03)

ii) What other measures do you consider appropriate to address to the problem if devaluation is
     not adopted. (03)

Q.3 (B) A dialogue took place between two executives of a bank:

Mr.X. “The steps being taken by SBP are definitely sending the signal in the market that a tight monetary policy is being pursued”.

Mr. Y. “without doubt, they (SBP) have raised the discount rate and recently increased the cash/statutory liquid reserve requirements. The cut off rates of T-Bills and FIBs are gradually rising. The purpose is to push the inflation down.

Mr.Y. “Low inflation would definitely reduce the input prices as well as real exchange and real interest rates which would make the investment propositions more lucrative.

Mr.X “but tightening of money supply would push the mark-up which would discourage investment.

Mr. Y “I agree. Moreover, the higher financial cost may push-up price of output which would increase inflation pressure”.

Based on the above discussion, answer the following questions.

i) Is tightening of money supply justified in the present scenario. Base your answer on the issues
    raised in the aforesaid discussion. (03)

ii) Are the remarks given by Mr.X about discouragement of investment in the economy teneable. (03)

Q.3 (C) Extract from SBP Third Quarterly Report for FY06

By end-February 2006, government borrowing for budgetary support from the banking sector had exceeded the Rs 98.0 billion FY06 annual target by 64 percent, principally due to substantial borrowings from SBP. However, the inflows under PTCL privatization and the issuance of Eurobonds during March 2006 allowed the government to retire a large part of these borrowings. As a result, the cumulative government borrowings from the banking sector dropped to Rs 120 billion during 1st Jul-10th June FY06, which remains higher than that in the corresponding period of FY05.

The growth in private sector credit during 1st Jul-10th June FY06 was a little higher than the annual credit plan estimates for the year, but was significantly lower than the increase during the same period of FY05. This slowdown is despite the larger increases in trade-related loans and the private sector commodity finance during Jul-May FY06 compared with the preceding year. This slowdown in the credit market appears to be driven by both demand and supply side factors.

Your senior executive has invited your comments to above paragraphs more specifically to :

A) Government borrowings trend in FY 2006 and your expectations for the current fiscal-FY2007. (03)
B) Private sector credit decline; reasons and expectations for FY 2007. (03)

Q.4 (A) What is the difference in the national income accounts between:

i) A firm buying an auto for an executive and the firm’s paying the executive additional income to buy the     automobile herself. (02)

ii) You have decided to buy a foreign car rather than a Pakistani car. (02)

Q.4 (B) Case studies and Application Modules.

The Consumer Price Index for four years 2002 – 2005 is given hereunder with 2003= 100.

                                        2002               2003             2004             2005
                                         87.3                100              109.3            246.5

Find the purchasing power of Rupee for 2002 – 2005. What was 2005 rupee worth in terms of 2002 rupee? (04)

Q.5 (A) What policies have been adopted to liberalize financial sector in Pakistan evaluate the                   effectiveness of these policies. (08)
Q.5 (B) What steps would you propose to improve the functioning of credit markets in Pakistan. (10)
Q.6 (A) Why does a reduction in aggregate demand reduce total output rather than price level. (04)
Q.6 (B) Why would an up sloping aggregate supply curve weakens the realized multiplier effect. (04)
Q.7 (A) How does fiscal policy work in an open economy. (04)
Q.7 (B) “Inflations is a stimulus to investment in a developing economy.” Do you agree? Explain. (04)