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Econ 220 Y2s2 Question Paper

Econ 220 Y2s2

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2010

COURSE CODE: ECON 220
COURSE TITLE: INTERMEDIATE MACROECONOMICS
STREAM: Y2S2

INSTRUCTIONS:
1. Attempt question ONE and any other TWO questions.
2. Appropriate diagram may be used to illustrate your answer.
3. All working’s must be shown clearly

1. (a) Considering the theoretical point of view, distinguish between classical macroeconomics
and Keynesian macroeconomics. (5 marks)
(b) Consider the following open economy macromodel:
C = 200 + 0.8 yd

I = 100
G = 100
X = 20
M = 10 + 0.1 y
T = 20 +0.25 y
Where yd is disposable income
(i) Compute the equilibrium level of national income for the open economy. (4 marks)
(ii) What are the equilibrium levels of consumption, imports and taxes that correspond to the
equilibrium national income. Your workings must be shown clearly. (41/2 marks)
(iii) Suppose G is increased by 50, compute the change in national income and consumption.
(5 marks)
(iv) Using the information in 1 (b), explain the position of government budget for this
economy. (3 marks)
(v) Compute and interpret the sign of the tax multiplier. (31/2 marks)
(C) (i) What is a balanced – budget multiplier? (1 mark)
(ii) Show that a balanced – budget multiplier is always equal to one. (2 marks)
(iii) Suppose the government pursues a balanced-budget policy, what is the effect on
National income? (2 marks)
2. (a) (i) Explain the absolute income hypothesis (4 marks)
(ii) Explain the limitations of relative income hypothesis. (6 marks)

(iii) Explain the ‘Ratchet effect’ in consumption behavior (3 marks)
(b) (i) Explain the accelerator theory of investment. (3 marks)
(ii) What is NPV (1 mark)
(iii) Using NPV Criteria, explain the decision rule for an investment project. (3 marks)
3. (a) Explain the contribution of central bank to money supply process. (4 marks)
(b) Explain the use of multipliers in economic analysis. (3 marks)
(c) The economy of country X is described by the following equations:
C = 180 +0.7y [consumption function]
I = 300 – 200 r [investment function]
G = 40 [Government spending]
MS
= 360 [money supply]
Md
t = 0.25 y [transactions demand for money]
M d
sp = 100 – 400 r [speculative demand for money]
(i) Derive the IS and LM equations for this economy. (6 marks)
(ii) Calculate the equilibrium values of y and r that simultaneously clear the product and
money markets (4 marks)
(iii) Compute the equilibrium values of 1 and total money demand Md (3 marks)
4 (a) With reference to Keynesian theory, explain the transactions and precautionary demand for
money. (6 marks)
(b) Explain the limitations of accelerator theory of investment. (5 marks)
(c) Explain the determinants of investment (41/2 marks)
(d) Using the marginal efficiency of capital criteria (MEC) explain the decision rule for an
investment project. (41/2 marks)

Econ 220 Y2s2 Question Paper

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