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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:2008

INSTRUCTIONS:
1. Answer QUESTION ONE and any other TWO questions.
PLEASE TURN OVERPage 2 of 3
QUESTION ONE
(a) The multiplier for a two-sector economy is computed to be 4. Derive the
following:
(i) The saving function (3mks)
(ii) The consumption function (3mks)
(b) Show that the balanced budget multiplier is always equal to unity (6mks)
(c) Suppose that an economy is in equilibrium at
Y = C + I + G + GT + (X –M)
Where,
C = 50 + b (Y – 50 – tY + GT)
I = 100
G = 50
GT = 25 (transfer payments)
X = 10
M = 5 + 0.1Y
b = 0.8
t = 0.25
(i) Find the national income at equilibrium (4mks)
(ii) Find the foreign trade multiplier. (4mks)
(iii) How much additional government expenditure will be required to increase
the equilibrium level of national income by Shs.50? (4mks)
(d) Giving an appropriate example, explain the term economic model. (6mks)
QUESTION TWO
(a) Explain the following terms:
(i) Moderate inflation
(ii) Galloping inflation
(iii) Hyper inflation (6mks)
(b) Assuming the money supply (M) is defined as the sum of currency (C) plus
deposits (D); M = C + D
Required:
Derive the money multiplier in terms of the currency and reserve ratio.
(8mks)Page 3 of 3
(c) Seignorage revenue is an inflationary method of financing fiscal deficit but under
Certain circumstances it is preferred to other options.
(i) Provide a detailed explanation of what seignorage revenue is.
(3mks)
(ii) Under what circumstances is signorage revenue preferred. (3mks)
QUESTION THREE
Suppose
e =
x
(w - x) ?
and x = (1 – bu)wa
Where: e = effort
w = is the labour market condition
v = is the unemployment level.
Wa = is the wage paid by other firms.
b>0; 0< B<1
(a) Show that at the equilibrium point the elasticity of effort to wages is equal
to one. (8mks)
(b) Determine the equilibrium effort. (12mks)
QUESTION FOUR
(a) Explain the following terms
(i) Fixed exchange rate. (2mks)
(ii) Flexible exchange rate (2mks)
(b) Define the nominal exchange rate and the real exchange rate. (6mks)
(c) With the help of diagrams, explain how expansionary fiscal policies at home and
abroad can influence the real exchange rate. (10mks)
QUESTION FIVE
(a) Explain why changes in consumption are unpredictable if consumers obey the
permanent income hypothesis and have rational expectation. (6mks)
(b) Explain the permanent income hypothesis of consumption and asses its criticisms.
(11mks)
(c) Identify the criticisms of the relative income hypothesis. (3mks)

Econ 320: Advanced Macro Economics Question Paper

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