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Microeconomic Theory I Question Paper
Microeconomic Theory I
Course:Master Of Economics
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
SUPPLEMENTARY EXAMINATION FOR THE DEGREE OF MASTER OF
ECONOMICS
EET 501: MICROECONOMIC THEORY I
DATE: Monday
23rd November 2009
TIME: 9.00 am – 12.00 Noon
INSTRUCTIONS:
Answer any FOUR questions. All questions carry equal marks.
1.
a)
i)
Using a diagram, show and explain tax, consumption and saving
functions.
[3marks]
i)
Show graphically the equilibrium level of income and explain what
happens
if
there
is
increase
in the desire to save.
[4marks]
b)
Given
that
y = c(y - t )+ i + g
Where y=real output, t=taxes, i=investment and g=government purchases
i)
Show that balanced budge multiplier (dy/dg) = 1
[4marks]
ii)
Assuming that tax is a function of income, t=t(y), derive the
general
multiplier
expression.
[3marks]
c)
Explain
the
meaning
of the following terms
i)
Crowding
out
effect
[6marks]
ii)
Liquidity
trap
[5marks]
2.
a)
Show and explain money and market equilibrium and derive the LM
curve.
[9marks]
b)
Using diagram, explain the effectiveness of the monetary policy.
[5marks]
Page 1 of 3
c)
Explain how the economy moves towards equilibrium if it is operating
from
a
point
of
disequilibrium. [11marks]
3.
a)
Assuming a small open economy, show and explain how fiscal policy at
home and abroad affects the trade balance.
[9marks]
b)
Using Mundel-Fleming model, explain the effectiveness of monetary and
fiscal policy in influencing aggregate income of an economy under
flexile
exchange
rate.
[10marks]
c)
Explain the effect of trade under fixed exchange rate system.
[6marks]
4.
a)
Given that an individual lives for two periods and that he/she inherits no
assess and leaves no bequest,
i)
Show that savings in period one equals the opposite of saving in
period
two.
[2mark]
ii)
Show and explain his/her inter temporal budge constrain.
[4marks]
b)
Explain the life cycle hypothesis and why it may not explain consumption
behaviour
in
your
country
adequately. [9marks]
c)
Most theories of consumption consider income as the only determinant of
consumption. Explain other factors that are likely to influence the
consumption
behaviour
of
people.
[10marks]
5.
a)
Explain the following models of investment
i)
the
accelerator
model
[5marks]
ii)
the
adjustment
cost
approach
[5marks]
iii)
the
q-theory.
[5marks]
b)
Explain various policies which can be adopted to increase the level of
private
investment
in
your
country.
[10marks]
6.
a)
Using the Solow Model
i)
explain
clearly
the
assumption underlying this model
[3marks]
Page 2 of 3
ii)
derive
k = sf (k ) - (n + g + d )k and explain the terms in this equation.
[7marks]
iii)
Using diagram plot the expression for k as a function k.
[5marks]
b)
Explain the meaning of the balance growth path and using a phase
diagram, explain what happens to output and consumption if saving
increase.
[10marks]
Page 3 of 3
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