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Solution 1. There might be two outcomes of the this scheme.

One that the hand


pump is useful and leads to increase in the overall capacity of the economy. Leading
to the permanent shift in the long run supply curve.
Case 1. (Fig 1) When Handpump is useful. Aggregate supply curve shifts right
leading to the shift in aggregate demand as well. Since handpump will lead to
increased agriculture productivity, long run supply curve wil shift right. This will lead
to increase in the productivity, quantity produced more permanently. Thus the
economy grows.
Case 2. (Fig 2) When hand pumps were not useful. As in the movie, people didnt
had money to install handpump. This means that handpumps were useless for
farmers except for may be in short run, farmer can earn money by selling
handpumps itself. Thus, in the short run, there is rise in aggregate demand.
However, it does not lead to any change in long run supply curve. Since there is no
change in capacity or productivity, this demand will only lead to short term inflation.
(this inflation will be insignificant and the curve will reach back its equilibrium point)

Solution 2. Lets do some maths


AD= C+G+I+Nx
Y(1-c)=Cbar+c*TRbar-c*TAbar+Ibar
Y*0.1=5000+0.9*10000-0.9*8000+50000
Y=568000

For illustration refer to Fig 3

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.

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