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Econ 321: Advanced Microeconomics Question Paper

Econ 321: Advanced Microeconomics

Course:Bachelor Of Science In Economics And Mathematics

Institution: Kabarak University question papers

Exam Year:2009

COURSE CODE: ECON 321
COURSE TITLE: ADVANCED MACROECONOMICS
STREAM: Y3S2
DAY: TUESDAY
TIME: 9:00 – 11:00A.M.
DATE: 08/12/2009
INSTRUCTIONS:
Answer question ONE and any other TWO questions.

1. (a) Show that the balanced budget multiplier is always equal to unity
(6mks)
(b) Given the following model
Y = C + I + G + (X – M)
C = a + b (Y–T)
M = m + m y
(i) Derive the multiplier assuming text to be lump-sum (5mks)
(ii) Assuming that tax is a function of income, determine the equilibrium level of income
(5mks)
(c) Suppose behavioural and structural equations for an economy are given as follows:
C = 100 + 0.80Yd
yd = Y – T
I = 50
G = 50
T = 50
Required
(i) Identify the endogenous and exogenous variables (2mks)
(ii) Derive reduced form of endogenous variable (3mks)
(iii) Find equilibrium values for each endogenous variable (3mks)
(d) Explain the assumptions of the accelerator theory of investment (6mks)
2. (a) Distinguish between:-
(i) Nominal exchange rate and the real exchange rate (4mks)
(ii) Fixed exchange rate and floating exchange rate (2mks)
(b) With the help of a diagram, explain how expansionary fiscal policy abroad can influence
the real exchange rate (7mks)
(c) Explain the impact of protectionist trade policies on the real exchange rate (7mks)
3. Suppose
l = ú
û
ù
ê
ë
é -
x
w x
b
and x = (1 – bu)wa
Where: l = effort
x = is the labour market condition
w = is the wage offered by the firm
wa = is the wage paid by other firms
b>0; 0<?<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)
4. (a) Identify the weaknesses of Fisher’s version of the quantity theory of money (5mks)
b) Assuming the money supply (M) is defined as the sum of currently (C) plus deposits (D);
M = C + D
Required
Derive the money multiplier in terms of the currency and reserve ratio. (8mks)
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 Seignorage revenue preferred (4mks)
5. (a) With aid of a diagram show that according to the relative income hypothesis, the short-run
average propensity to consume is greater than the long run average propensity to consume
(14mks)
(b) Explain the shortcomings of the relative income hypothesis
(6mks)

Econ 321: Advanced Microeconomics Question Paper

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