# ISI Sample Paper 2013 ME-II Doubts Classic List Threaded 15 messages Open this post in threaded view
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## ISI Sample Paper 2013 ME-II Doubts

 Hey, any sort of clue or hints would be greatly appreciated. 8. A consumer consumes two goods, x1 and x2, with the following utility function U(x1, x2) = U1(x1) + U2(x2). Suppose that the income elasticity is positive. It is claimed that in the above set-up all goods are normal. Prove or disprove this claim. 7. A positive investment multiplier does not exist in an open economy simple Keynesian model when the entire amount of investment goods is supplied from import. Examine the validity of this statement.
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## Re: ISI Sample Paper 2013 ME-II Doubts

 7 .  i think ans-true because if investment increases from i to 2i ,then extra investment is i ,due to this i demand increases by i ,but this all extra investment i is imported so this i is now income of a foreigner implies no multiplier effect and also  this import i would reduce demand of domestic goods by i , so overall net demand change is 0  therefor multiplier is 0
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## Re: ISI Sample Paper 2013 ME-II Doubts

 hi net demand change would have been zero if this would have been classical case, but here in keynsian model... shouldn't there be a positive multiplier effect because the increase in consumption does have a positive effect (as its not ordinary consumption, ultimately its being used for investment purpose only). Though imports may have a negative effect but overall effect should be positive, i think.....
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## Re: ISI Sample Paper 2013 ME-II Doubts

 Hey kawai, You pointed out rightly that effect will be manyfolds in Keynesian Cross. But its still negative in this case. E (Planned Expenditure)= C* + c(Y-T) - (I* -bi) + G* + NX (other than investment) Let NX =  Export - Import = Export - mY Where  m = marginal propensity to import E = (C* + G* - I* - cT + Export) + cY - mY ....(For the sake of simplicity export component is assumed to be autonomous) In equilibrium E= Y Y ( 1-(c-m)) = Autonomous component of expenditure Delta Y ( 1-(c-m)) =  - delta I* Assuming interest rate to be constant.... So when Delta I* is positive output will decrease by  - Delta I* / (1-(c-m)) please let me know if you find something objectionable
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## Re: ISI Sample Paper 2013 ME-II Doubts

 Hi MI Thank you soo much !! :)
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## Re: ISI Sample Paper 2013 ME-II Doubts

 In reply to this post by MI Hey MI, which book did you refer for macro part???I completed Mankiw  n few chapters of Dornbusch & fisher still I fail to answer all the macro questions which I face....I asking this question to you coz I noticed that u answer Macro questions with quite an ease.which is absolutely stunning.... ..n also from where did you practicing question on it????? Plz help.. M.A Economics Delhi School of Economics 2013-15 Email Id:sumit.sharmagi@gmail.com
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## Re: ISI Sample Paper 2013 ME-II Doubts

 In reply to this post by MI delta i*=change in imports ,        i think u should  take this into accounting
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## Re: ISI Sample Paper 2013 ME-II Doubts

 In reply to this post by MI Hey MI, That sounds fair enough. I was thinking on some other lines. As the entire amount of investment goods are funded by imports then it should definitely be subtracted but where you've written -(I*-bi), I think this expression will entirely be 0 (as in we won't need to write it in the Income expression, Although its numerical value will be equal to some variable k of imports where 0
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## Re: ISI Sample Paper 2013 ME-II Doubts

 Hey Saureco, You have mentioned the transmission mechanism correctly. I also thought of it the same way. The reason I wrote Investment separately because the question asks about the effect of "investment multiplier". We can reach same conclusion by including investment in imports.
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## Re: ISI Sample Paper 2013 ME-II Doubts

 In reply to this post by Sumit Hey Sumit, I am only following Mankiw. And trying to solve past year questions.
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## Re: ISI Sample Paper 2013 ME-II Doubts

 @MI: I actually done ch-1 to ch-12 of mankiw (i.e till mundell-fleming model)....but done nothing after this at all..should I need to go for remaining chapters as well???? or can I do selective chapters???...plz advise... M.A Economics Delhi School of Economics 2013-15 Email Id:sumit.sharmagi@gmail.com
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## Re: ISI Sample Paper 2013 ME-II Doubts

 In reply to this post by Darth Vader 8-     if ux1  and ux2  have diminishing mu  then - mu1(only function of x1)/mu2(only function of x2)  =price ratio =fixed ,   since income elasticities are positive so there mu are positive lets assume that if we increase income x1* increases , X2* decreases implies- mu1(only function of x1) decreases but mu2(only function of x2) increases which is not possible because thier ratio is fixed this is a contradiction so it must not happen that consumption of one good increases and other good decreases this means consumption of both good should increase implies all goods are normal in the above setup  please tell me-    what do u think am i correct? amit sir please give guidence on this problem
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## Re: ISI Sample Paper 2013 ME-II Doubts

 Administrator Hi Srawan, Actually, there is nothing to solve in this problem: Q.  A consumer consumes two goods, x1 and x2, with the following utility function U(x1, x2) = U1(x1) + U2(x2). Suppose that the income elasticity is positive. It is claimed that in the above set-up all goods are normal. Prove or disprove this claim. A. Given that income elasticity of demand for all goods are positive i.e. (dx/dM)(M/x) > 0. This implies that dx/dM > 0. Hence, goods are normal.