IGNOU BECC 109 Solved Assignment 2022-23

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Submission Date :

31st March 2033 (if enrolled in the July 2033 Session)
30th Sept, 2033 (if enrolled in the January 2033 session).

Answer the following Descriptive Category questions in about 500 words each. Each question carries 20 marks. Word limit does not apply in case of numerical questions in Assignment One.

Answer the following Middle Category questions in about 250 words each. Each question carries 10 marks. Word limit does not apply in case of numerical questions in Assignment Two.

Answer the following Short Category questions in about 100 words each. Each question carries 6 marks in Assignment Three.

Answer all the questions.

Assignment One

1.What type of inconsistency is observed in cross-sectional and time series data on
consumption? Explain how the permanent income hypothesis reconciles it.

The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income. The level of expected long-term income then becomes thought of as the level of “permanent” income that can be safely spent. A worker will save only if their current income is higher than the anticipated level of permanent income, in order to guard against future declines in income.

Something similar can be said of individuals who are informed that they are to receive an inheritance. Their personal expenditures could change to take advantage of the anticipated influx of funds, but per this theory, they may maintain their current spending levels in order to save the supplemental assets. Or, they may seek to invest those supplemental funds to provide long-term growth of their money rather than spend it immediately on disposable products and services.

Understanding the Permanent Income Hypothesis

The permanent income hypothesis was formulated by the Nobel Prize-winning economist Milton Friedman in 1957. The hypothesis implies that changes in consumption behavior are not predictable because they are based on individual expectations. This has broad implications concerning economic policy.

Under this theory, even if economic policies are successful in increasing income in the economy, the policies may not kick off a multiplier effect in regards to increased consumer spending. Rather, the theory predicts that there will not be an uptick in consumer spending until workers reform expectations about their future incomes.

Milton believed that people will consume based on an estimate of their future income as opposed to what Keynesian economics proposed; people will consume based on their in the moment after-tax income. Milton’s basis was that individuals prefer to smooth their consumption rather than let it bounce around as a result of short-term fluctuations in income.

Spending Habits Under the Permanent Income Hypothesis

If a worker is aware that they are likely to receive an income bonus at the end of a particular pay period, it is plausible that the worker’s spending in advance of that bonus may change in anticipation of the additional earnings. However, it is also possible that workers may choose to not increase their spending based solely on a short-term windfall. They may instead make efforts to increase their savings, based on the expected boost in income.

Liquidity and the Permanent Income Hypothesis

The liquidity of the individual can play a role in future income expectations. Individuals with no assets may already be in the habit of spending without regard to their income; current or future.

Changes over time, however—through incremental salary raises or the assumption of new long-term jobs that bring higher, sustained pay—can lead to changes in permanent income. With their expectations elevated, employees may allow their expenditures to scale up in turn.

2). Why is debt stabilisation important for an economy? On the basis of government
budget constraint explain how debt-to-GDP ratio can be maintained.

The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

What the Debt-to-GDP Ratio Can Tell You

When a country defaults on its debt, it often triggers financial panic in domestic and international markets alike. As a rule, the higher a country’s debt-to-GDP ratio climbs, the higher its risk of default becomes.

Although governments strive to lower their debt-to-GDP ratios, this can be difficult to achieve during periods of unrest, such as wartime or economic recession. In such challenging climates, governments tend to increase borrowing to stimulate growth and boost aggregate demand. This macroeconomic strategy is attributed to Keynesian economics.

Economists who adhere to modern monetary theory (MMT) argue that sovereign nations capable of printing their own money cannot ever go bankrupt, because they can simply produce more fiat currency to service debts. However, this rule does not apply to countries that do not control their monetary policies, such as European Union (EU) nations, who must rely on the European Central Bank (ECB) to issue euros.

Good vs. Bad Debt-to-GDP Ratios

A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth. Pointedly, every percentage point of debt above this level costs countries 0.017 percentage points in economic growth. This phenomenon is even more pronounced in emerging markets, where each additional percentage point of debt over 64% annually slows growth by 0.02%.

The U.S. has had a debt-to-GDP over 77% since 1Q 2009.3 To put these figures into perspective, the U.S.’s highest debt-to-GDP ratio was previously 106% at the end of World War II, in 1946.

Debt levels gradually fell from their post-World War II peak, before plateauing between 31% and 40% in the 1970s—ultimately hitting a historic 23% low in 1974. Ratios have steadily risen since 1980 and then jumped sharply following 2007’s subprime housing crisis and the subsequent financial meltdown.

The landmark 2010 study entitled “Growth in a Time of Debt,” conducted by Harvard economists Carmen Reinhart and Kenneth Rogoff, painted a gloomy picture for countries with high debt-to-GDP ratios.5 However, a 2013 review of the study identified coding errors, as well as the selective exclusion of data, which purportedly led Reinhart and Rogoff to make errant conclusions.

Assignment Two

3) Give a brief overview of the Romer growth model.
4) In the Solow model of economic growth, discuss the factors that determine long run
living standard.
5) Bring out the salient features of new-classical macroeconomics.

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Assignment Three

6) What are the various types of demand for money according to Keynes?
7) Explain the motives of holding inventory.
8) Bring out the important features of business cycles.
9) Give a brief account of the policy lags that affect smooth functioning of the economy.
10) Write a short note on the concept of Ricardian equivalence.

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