• McMaster University

• ECON 3T03

Assignment 3 (FALL 2021)
FILL IN THE DETAILS BELOW:
 
Please note the following. It is your responsibility to carefully read and understand the instructions
specified below to avoid any grade penalty:
1. This assignment is to be submitted electronically on AVENUE TO LEARN on OCT 17, 2021
(SUNDAY) BEFORE 11.30pm (EDT).
2. LATE SUBMISSION POLICY: 10 percentage point grade deduction for every 10 minutes
delay in submission - for example, there will be a 1 mark grade penalty if it is submitted within
1-9 minutes after the stipulated deadline, there will be a 2 marks grade penalty if it is submitted
within 10 -19 minutes after the stipulated deadline and so on.
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SCANNED DOCUMENT (in .pdf format). However, the answers must be clearly legible for
grading purposes.
5. Please answer the question (with sub parts) in the space provided. ANSWERS
SUBMITTED OTHERWISE OR ELSEWHERE WILL NOT BE GRADED.
6. Your answers must be yours only! If there is any indication of copying the answers or
mutual plagiarism, steps will be taken following McMaster Academic Integrity Rules and
Regulations.
1

QUESTION (10 marks)
Chapter 6 from the textbook covers the interrelationship between health per capita and output per capita
Suppose our focus is now upon quality of government measured by a proxy variable g, which is given by
the ratio of productive government expenditure and population. It is observed, in general a rich country
can afford to spend more on its citizen in form of government expenditure and a poor country is
characterized by limited ability of its government in terms of spending on its citizens. This is the Income
View. Likewise, higher the value of g is, the production sector of the economy is more productive through
active involvement of the government in the sector or by means of productive government funding. This
is the government view.
Following the same methodology, we covered in the context of health per capita and output per capita:
i) Draw a well labeled graph showing the interrelationship between y and g in terms of g(y) and
y(g) curve in a y-g space (measuring y along the horizontal axis and g along the vertical axis).
Typically, it is observed that as income within a country rises, the effects of additional income
will increase the quality of government, but it will not increase the quality of government
proportionally. Given this, which curve should be steeper? Indicate the point of equilibrium
on your graph. (1+1 = 2 marks)
ii) Suppose the government decides to offer production subsidy (for encouraging production
sector) leading to the following outcomes:
- at every level of y, ratio of productive government expenditure and population increases.
- at very level of g, output per capita increases.
Show the impact on the equilibrium using a separate graph, by explaining the possible shift(s)
of the curve(s). Explain your answer. (3 marks).
iii) If suppose the government wastes a lot of its revenue due to corrupt politicians, everything
else remaining the same. Show the impact on the equilibrium using a separate graph, by
explaining the possible shift(s) of the curve(s). Explain your answer. (3 marks).
iv) Based on your answer for part iii, explain in 2-3 sentences how does political corruption
affect the output per capita and hence standard of living of an economy. (2 marks: 1 mark for
correct answer and 1 mark for quality of explanation).