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Solution 2b) Prior assumption, the increase in investment by private sector and
increase in tax revenue in bound to be part of Natha Card scheme overall.
We would like to chose Natha Card over Lal Bahadur primarily because fo following
reasons.
a. Investment in Lal Bahadur was a waste and did not lead to any capacity
building or any increase in productivity.
b. Natha Card is bringing investment by private sector which can utilized for
capacity (meaningful) in the rural economy.
However, if the increase in investment is not the part of the Natha Card scheme.
The Tranfer payment are not necessarily the best way to spend the money. The
contribution from increase in government expenditure can be explained by income
multiplier i.e. alphaG=10. However, the contribution from any transfer payment is 9
which is lower. Thus, it is not advised to use the populist measure such as transfer
payment. It is not efficient way of spending the money.
Solution 3. Refer Fig 4. It is positive supply shock. It will increase the availability of
the grain in the market(the grain which other wise would rot will be available to
consume). Thus, the supply curve will shift right. This will draw the price of the
commodity down. This will lead to rise in demand. However, the final equilibrium
will still have lesser price but more quantity.
Solution 4.