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Econ 320: Advanced Macro Economics Question Paper
Econ 320: Advanced Macro Economics
Course:Bachelor Of Science In Economics And Mathematics
Institution: Kabarak University question papers
Exam Year:2009
INSTRUCTIONS:
1. Answer question ONE and any other TWO questions.
QUESTION ONE
a) Consider an economy described by the following equations:
Y = C + I + G + NX
Y = 5000
G = 1000
T = 1000
C = 250 + 0.75 (Y – T)
I = 1,000 – 50r
NX = 500 – 500E
r = r*
= 5.
i) In this economy, solve for national saving, investment the trade balance
and the equilibrium exchange rate. (4mks)
ii) Suppose that G rises to 1,250. Solve for national saving, investment, the
trade balance and the equilibrium exchange rate. (4mks)
iii) Suppose that the world interest rate rises from 5 to 10 percent. (G is again
1,000). Solve for national saving, investment, the trade balance and the
equilibrium exchange rate. Explain what you find. (4mks)
b) Distinguish between the following:
i) Capital and investment (2mks)
ii) Autonomous and induced investment. (2mks)
iii) Net and Gross investment. (2mks)
iv) Endogenous and exogenous variables. (2mks)
c) With the use of an example explain the term economic model. (4mks)
d) Identify the assumption of the acceleration theory of investment. (6mks)
QUESTION TWO
Discuss how the following policies influence the real exchange rate.
i) Fiscal policy at home. (5mks)
ii) Fiscal policy abroad (5mks)
iii) Shifts in investment demand (5mks)
iv) Protectionist trade policies (5mks)
QUESTION THREE
a) Assuming that money supply is defined by the currency outside the banking
sector and the bank deposits and that banks face the statutory liquidity.
Required:
Derive the money multiplier. (8mks)
b) Discuss how the government finances its budget deficit. (4mks)
c) What are the main tools of monetary policy in Kenya. (8mks)
QUESTION FOUR
Suppose e = ÷
ø
ö
ç
è
æ -
x
w x b
and x = (1 – bu)wa where e is effort, w is the wage offered by the
firm; x is the labour market condition; b is the elasticity of effort to premium paid over
the index of labour market condition; u is unemployment level; wa is wage paid by other
firms; b>0; 0 < b <1.
i) Show that at the equilibrium point the elasticity of effort to wages is equal
to one. (8mks)
ii) Determine the equilibrium effort. (12mks)
QUESTION FIVE
a) Explain the life-cycle hypothesis of consumption and asses its criticisms.
(10mks)
b) Identify the main features of Friedman’s method of measuring permanent income.
(4mks)
c) Explain why changes in consumption are unpredictable if consumers obey the
permanent income hypothesis and have rational expectations. (6mks)
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