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Macro Notes

The document discusses the central bank's monetary policy tools, including open market operations and interest rate adjustments, to manage money supply and inflation. It also covers the impact of taxes on market outcomes, deadweight loss, and the effects of income tax increases on aggregate demand. Additionally, it highlights the balance of payments deficit in Pakistan and the role of fiscal policy in promoting economic growth through infrastructure, education, and health investments.

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11 views6 pages

Macro Notes

The document discusses the central bank's monetary policy tools, including open market operations and interest rate adjustments, to manage money supply and inflation. It also covers the impact of taxes on market outcomes, deadweight loss, and the effects of income tax increases on aggregate demand. Additionally, it highlights the balance of payments deficit in Pakistan and the role of fiscal policy in promoting economic growth through infrastructure, education, and health investments.

Uploaded by

ef7963615
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Q1.

The central bank controls money supply through expansionary (increasing money supply to boost
growth) and contractionary (reducing money supply to control inflation) policies. Example: The State
Bank of Pakistan (SBP) reduced interest rates during COVID-19 to stimulate the economy and raised
them in 2023 to curb inflation.

Q1. B

Instruments of SBP to Control Money Supply:

1. Open Market Operations (OMO) – Buying/selling government securities.

2. Discount Rate Policy – Adjusting interest rates for banks.

3. Reserve Requirements – Changing minimum bank reserves.

4. Moral Suasion – Persuading banks informally.

5. Credit Ceiling & Direct Controls – Limiting sectoral credit expansion.


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Q2. A

Effect of Taxes on Market Outcome

Table.......

Both share tax burden based on elasticity.

Q2. B

Deadweight Loss (DWL)

DWL is economic inefficiency from market distortions like taxes.

Formula:

DWL = \frac{1}{2} \times (Tax) \times (Reduction in Quantity)

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Q3. A

Climate Change & Carbon Taxes


Carbon taxes reduce pollution by increasing fossil fuel costs, pushing cleaner energy use. Examples:
Sweden and Canada successfully reduced emissions.

Should Pakistan Apply Carbon Taxes?

Yes, but gradually, ensuring alternative energy investments to protect industries.

Q3. B

Sources of Public Revenue

Table......

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Q4. A

Effect of Income Tax Increase on Aggregate Demand

Higher income tax reduces disposable income, leading to:

Lower consumer spending (C).

Lower investment (I).

Reduced aggregate demand, slowing GDP growth.


Example: Increased tax in Pakistan reduces luxury spending.

Q4. B

Balance of Payments (BoP) & Pakistan’s Deficit

Causes of Deficit:

1. High Trade Deficit – Imports exceed exports.

2. Debt Servicing – High external debt payments.

3. Low FDI – Weak investor confidence.

4. Energy Crisis – Lower industrial productivity.

Remedial Measures Taken:

1. Import Restrictions – Ban on non-essential imports.


2. Export Promotion – Incentives for exporters.

3. Foreign Loans & IMF Support – External funding.

4. Remittance Incentives – Encouraging overseas Pakistani inflows.

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Q5.

Fiscal Policy & Economic Growth

Fiscal policy (government spending & taxation) supports:

Infrastructure – Creates jobs, boosts productivity.

Education – Improves skilled workforce.


Health – Enhances worker productivity.

Effective? Yes, but should be managed to avoid deficits. Example: China’s infrastructure-driven growth.

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