KENYA METHODIST UNIVERSITY

END OF 1ST TRIMESTER 2017 (PT) EXAMINATION

SCHOOL		:	BUSINESS AND ECONOMICS 
DEPARTMENT	:	ECONOMICS AND STATISTICS
UNIT CODE		: 	ECON 102
UNIT	TITLE	:	PRINCIPLES OF MACROECONOMICS
TIME			: 	2 HOURS

INSTRUCTIONS
Question One is compulsory; answer any other two questions

Question One (30 Marks)
a.	Write short notes on the following;
(i)	Monetary and fiscal policy
(ii)	Economic integration
(iii)	Balance of payment
(iv)	National income
(v)	Inflation and deflation

b.	Assume the following information represents the national income model of an economy
Y = C + 1+ G
C = a + b (Y-T)
T =  + ty
I = Io
G = Go

Where a > 0; 0 <b < 1
T = Taxes
I = Investment
G = Government expenditure
(i)	Find the equilibrium values of income consumption and taxes
(ii)	Explain the economic interpretation of parameters a, b, d and t
(iii)	Explain how national income is measured

c.	i) Critically discuss the main limitations of applying credit control instruments in developing economies
ii) Explain factors which contribute to the low economic growth rates in most developing countries
iii) Distinguish between economic growth and economic development
Question Two (20 Marks)
a)	Define the term marginal propensity to save 
b)	The following table represents economic transaction for country Z in billions of dollars
	Total Output	Intermediate purchases	
Mining 	55	25	
Services 	70	45	
Horticulture 	30	10	

Required:
Use the value added approach to calculate the Gross domestic product of the economy
c)	Using the graphical representation of Keynesian model explain how the following affects consumption expenditure 
(i)	Increase in cost of credit
(ii)	Future expectations
d)	Explain the significance of the Keynesian theory of unemployment to the Kenyan economy
Question Three (20 Marks)
a)	Explain the limitations of using per capita income statistics to compare standard of living on different countries
b)	Discuss the major reasons why countries engage in international trade
Question Four (20 Marks)
a)	Enumerate the functions of the central bank of Kenya
b)	Explain any four monetary instruments and show how they are used to ensure economic stability of a country
c)	List any four functions of money
Question Five (20 Marks)
a.	Outline any fiscal measures that the government can implement to reduce the unemployment in the nation
b.	Why do masses of citizens continue to migrate from diverse rural settings to crowded cities in spite of high and rising levels of urban unemployment
c.	Explain how national income is measured