Macro Economics Question

Assignment 3 has been attached

Q1: What is money multiplier? How is it related to the reserve ratio? Calculate the total maximum and total minimum possible money supply due to the deposit of 200 SAR in a bank. The country follows a fractional reserve banking system, and the Reserve ratio is 20%. [2.5 Marks]

Caselet On Unemployment (Question no 2&3)

Many Theories are given by different experts to explain the reasons behind unemployment. One reason for unemployment may be downswings (periods of recession) in the business cycle.

Another reason behind wide-scale unemployment refers to structural unemployment. Structural unemployment arises from longer-term changes in the economy, affecting specific industries, regions, and occupations. Structural unemployment often explains regional unemployment. Some industries in India have lost their business and so employment to the cheaper imports coming from abroad.

Some experts explain that new technology is a cause of unemployment which is also known as technological unemployment. The argument is that the introduction of new technology is destroying jobs and business while at the same time imports from low-wage developing countries are undercutting goods produced in this country.

However, many studies may contradict this. New technologies generally help in producing new products, or services and therefore new areas of employment. Sometimes fewer workers may be required in some areas of production where specific tasks are taken over by machines, but rising productivity boosts overall income and then the demand for new jobs in the economy as a whole.

Q2: What are the main causes of Unemployment? Do you agree that technological up-gradation in any industry may cause unemployment in that industry? Provide your opinion with one example. [2.5 Marks]

Q3: Structural unemployment in many countries touched its highest peak during the coronavirus pandemic, but it seems that most of the industries in KSA were not that much affected. Discuss the role of the Saudi Government in reducing the impact of Corona pandemic on employment in Saudi Arabia. [2.5 Marks]

Caselet On Insurance Market (Question no 4)

In a sense, every insurance contract is a gamble. It is possible that you will not be in an auto accident, that your house will not burn down, and that you will not need expensive medical treatment. In most years, you will pay the insurance company the premium and get nothing in return except peace of mind. Indeed, the insurance company is counting on the fact that most people will not make claims on their policies; otherwise, it couldn’t pay out the large claims to the unlucky few and still stay in business.

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life but to spread them around more efficiently.

The markets for insurance suffer from two types of problems that impede their ability to spread risk. One problem is adverse selection: The second problem is moral hazard:

Q4: Adverse Selection and Moral Hazard are two important problems of Insurance companies. Explain each with the help of an example. Also, suggest solutions to the Insurance companies to tackle these problems in the insurance market. [2.5 Marks]