IGNOU BECC 134 Solved Assignment 2022-23

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IGNOU BECC 133 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

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1. (a.) Explain how IS-LM curves are derived.

DERIVATION OF LM CURVE

The LM curve can be derived from the Keynesian theory from its analysis of money market equilibrium. According to Keynes, demand for money to hold depends upon transactions motive and speculative motive. It is the money held for transactions motive which is a function of income. The greater the level of income, the greater the amount of money held for transactions motive and therefore higher the level of money demand curve.

The demand for money depends on the level of income because they have to finance their expenditure, that is, their transactions of buying goods and services. The demand for money also depends on the rate of interest which is the cost of holding money. This is because by holding money rather than lending it and buying other financial assets, one has to forgo interest. Thus demand for money (Md) can be expressed as: Md= L(Y, r)where Md stands for demand for money, Y for real income and r for rate of interest.

Thus, we can draw a family of money demand curves at various levels of income. Now, the intersection of these various money demand curves corresponding to different income levels with the supply curve of money fixed by the monetary authority would gives us the LM curve. The LM curve relates the level of income with the rate of interest which is determined by money-market equilibrium corresponding to different levels of demand for money.

The LM curve tells what the various rates of interest will be (given the quantity of money and the family of demand curves for money) at different levels of income. In Figure below we measure income on the X-axis and plot the income level corresponding to the various interest rates determined at those income levels through money market equilibrium by the equality of demand for and the supply of money.

Slope of LM Curve:

It will be noticed from Fig that the LM curve slopes upward to the right. This is because with higher levels of income, demand curve for money (Md) is higher and consequently the money-market equilibrium, that is, the equality of the given money supply with money demand curve occurs at a higher rate of interest. This implies that rate of interest varies directly with income. It is important to know the factors on which the slope of the LM curve depends. There are two factors on which the slope of the LM curve depends.

First, the responsiveness of demand for money (i.e., liquidity preference) to the changes in income. As the income increases, say from Y0 to Y1, the demand curve for money shifts from Md0 to Md1, that is, with an increase in income, demand for money would increase for being held for transactions motive, Md or L1=f(Y).This extra demand for money would disturb the money market equilibrium and for the equilibrium to be restored the rate of interest will rise to the level where the given money supply curve intersects the new demand curve corresponding to the higher income level. It is worth noting that in the new equilibrium position, with the given stock of money supply, money held under the transactions motive will increase whereas the money held for speculative motive will decline. The greater the extent to which demand for money for transactions motive increases with the increase in income, the greater the decline in the supply of money available for speculative motive and, given the demand for money for speculative motive, the higher the rise in the rate of interest and consequently the steeper the LM curve, r = f (M2, L2) where r is the rate of interest, M2is the stock of money available for speculative motive and L2 is the money demand or liquidity preference function for speculative motive.

The second factor which determines the slope of the LM curve is the elasticity or responsiveness of demand for money (i.e., liquidity preference for speculative motive) to the changes in rate of interest. The lower the elasticity of liquidity preference for speculative motive with respect to the changes in the rate of interest, the steeper will be the LM curve. On the other hand, if the elasticity of liquidity preference (money demand function) to the changes in the rate of interest is high, the LM curve will be flatter or less steep.

(b) Explain how adjustments take place in IS-LM model to restore equilibrium

The Equilibration Process:

In struggling with the problem of teaching the student why the intersection of the IS and LM curves yields the general equilibrium solution to the interest rate and output variables, I wondered why students are able to understand quickly how a market equilibrates. The typical student knows that D=S generates the Pe, Qe combination that we seek. He also knows, however, the process by which such a solution is reached. From the first course in economics he is taught that any price above the equilibrium price generates a surplus which forces suppliers to cut prices in order to sell their inventories. On the other hand, a P below Pe results in a shortage and upward pressure on the price as consumers bid up the price. When asked why the intersection of S and D yields Pe, the typical student responds with this story. The student hasn’t memorized that S=D generates Pe, he has learned that there is an “equilibration process” at work.

As in microeconomics, equilibrium is defined as no tendency to change. In general, an endogenous variable (that is, a variable whose value is determined by forces within the system) can have an infinite possible range of values. In economics, most endogenous variables, such as output in a macro model, are usually constrained to be positive; but they can still take on any value from zero to positive infinity. The equilibrium value is one particular value—the one value where the variable has no tendency to change. Any other value is not a state of rest for there are forces within the model that will generate movement to a new value.The microeconomist’s story of how equilibrium is attained provides the key to teaching the concept of equilibrium price in a single market. Note how the presentation proceeds: (1) define equilibrium as no tendency to change, (2) pick a value and see if it has a tendency to change, and, (3) if it does, describe the forces that lead to change and point out the direction of the change. This explanation is understood by the vast majority of students. Simply put, as a means to communicate an idea, it really works! When asked why S=D generates the Pe, the typical response is built around the notion that forces are at work that will drive the price to a certain value. No attempt is made at repeating a memorized condition—as is usually the case when the question concerns equilibrium output in a macro model. The next step is obvious: if it works for explaining the equilibration process in a single market, let’s apply it to explain why IS=LM yields Ye. By following the three steps outlined above, we hope to get the same spectacular results in terms of understanding the IS/LM graph that we get in microeconomics.

Step (1): Defining equilibrium
As in microeconomics, equilibrium is defined as no tendency to change. In general, an endogenous variable (that is, a variable whose value is determined by forces within the system) can have an infinite possible range of values. In economics, most endogenous variables, such as output in a macro model, are usually constrained to be positive; but they can still take on any value from zero to positive infinity. The equilibrium value is one particular value—the one value where the variable has no tendency to change. Any other value is not a state of rest for there are forces within the model that will generate movement to a new value.

Step (2): Pick a value and see if it has a tendency to change Figure 1 shows an initial value of i0 and Y0 that’s on the IS curve, but not on the LM curve:

The student no doubt knows that the i, Y combination depicted in Figure 1 is not the equilibrium combination, but the crucial question is “Why?” To apply the “equilibration process” explanation to this question, we must show how and why the i0, Y0 pair has a tendency to change. In order to do this, we will bring to the front the set of graphs that underlies the IS/LM graph:

Look closely at the relationship between the IS/LM graph and the three graphs that compose the IS/LM graph. Being on the IS curve means that we are in equilibrium in the goods market; hence, I was careful to place Y0 on the intersection of the AD and 450 line. However, being off the LM curve means that the money market is not in equilibrium; therefore, the existing interest rate is clearly above the equilibrium interest rate.

Step (3): A Description of the Forces that Lead to Changes in i and Y and the Direction of those Changes:

From Figure 2 and Step 2 we know that both the i and Y variables are out of equilibrium and, therefore, that they will have a tendency to change. What we must determine is how and why that change will take place. Unfortunately, here it gets messy. Unlike microeconomics, where one basic equilibration process is taught (P < Pe –> higher P; P > Pe –> lower P), the IS/LM Model has several possible equilibration processes. Different equilibration processes arise when different assumptions regarding the speed and order in which the variables reach equilibrium are made. In this work, we will show the student three of the many possibilities.

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2. (a.) How is classical range of the LM curve different from Keynesian range? Explain
with the help of a diagram.

(b.) Explain Unemployment-inflation trade off with the help of diagram.

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Assignment Two

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3. What is inflation? Discuss various types of inflation.

4. Explain short run and long run equilibrium of an economy with the help of diagram.

5. Explain the impact of the expansionary fiscal and monetary policy on equilibrium prices and output.

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Assignment Three

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6. Differentiate between:
i) Demand pull and cost push inflation
ii) Nominal and real exchange rate

7. Explain absolute and relative purchase power parity.

8. Explain different types of unemployment in the economy.

9. What are adaptive and rational expectations?

10. Explain the factors that will result in the rightward shift in the Aggregate supply curve with the help of diagram.

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IGNOU BECC 134 Solved Assignment 2022-2023 Download Free  Before attempting the assignment, please read the following instructions carefully.

1. Read the detailed instructions about the assignment given in the Handbook and Programme Guide.
2. Write your enrolment number, name, full address and date on the top right corner of the first page of your response sheet(s).
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