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Econ 220: Intermediate Macroeconomics Question Paper
Econ 220: Intermediate Macroeconomics
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2009
Instructions.
1. Answer Question ONE and any other TWO questions.
2. Apart from question ONE all other questions carry equal marks. Marks for
subdivisions are shown in brackets.
3. Marks will be awarded to candidates who demonstrate clarity and
accuracy of presentation.
4. Diagrams should be used where helpful.
QUESTION ONE
Consider an economy described by the following equations.
C= 25 + 0.75Yd
[Consumption function]
I = 200 [Investment function]
G = 100 [Government expenditure]
T = 50 + 0.25Y [Tax function]
X = 30 [Export function]
M = 10 + 0.2Y [Import function]
R = 10 [Transfer payments]
Where:
Y = National Income
Y
d
=Income after tax
Where:
Y = National Income
Y
d
=Income after tax
REQUIRED.
a) Calculate:
i) Equilibrium level of National Income. (5mks)
ii) Levels of consumption, tax revenue and Net exports that correspond to the
equilibrium level of National Income. (3mks)
b) From (a), (ii) above identify the balance of trade. Which countries are
associated with this balance of trade and why? (5mks)
c) i. Compute and interpret government expenditure and tax multipliers. (4mks)
ii. Which of the two multipliers in (c) (i) above is larger and why? (3mks)
d) Define Phillips curve and explain its policy implication in the achievement of
macroeconomic policy objectives. (4mks)
e) Consider an economy described by the following equations,
{ }
{ }
{ }
I {Investment enditure}
G Government enditure
T Tax
C Y Consumption function d
10 exp
45 exp
10
40 0.75
=
=
=
= +
i. Define balanced budget (2mks)
ii. Compute and interpret balance budget multiplier (4mks)
QUESTION TWO
a) Define non discretionary macroeconomic fiscal policies and explain how they
work to achieve macroeconomic policy objectives. (4mks)
b) Consider an economy with potential G.D.P 1800 billions and actual G.D.P of
2700 billions.
i. If consumption function is given by C = 10+0.8Yd
, identify the G.D.P gap and
explain how it can be closed using fiscal policy tools. (4mks).
ii. Which policy in (b) (i) above would be most appropriate and why? (3mks)
c) Explain by aid of a diagram the Keynesian Dilemma in trying to solve the
stagflation problem of the early 1970’s. (4mks)
QUESTION THREE
a) Define Say’s law and explain its application in monetary economy. (4mks)
b) Consider the following equation of exchange:
MV=PY
Where:
M = Money Supply
V = Income velocity
P = Price level
Y = Real output
i) Explain the relationship between M and P in the short run according to the
quantity theory of money (4mks)
ii) Does this relationship hold in the long run? Explain your answer (3mks)
c) Suppose a consol bond is sold in the bond market for Ksh. 1000 and pays
Ksh. 500 in interest income per annum. Assume further that the price of the
bond subsequently rises to Ksh. 1400 and then falls to Ksh. 700.
i) Illustrate in algebraic and graphical terms that there exists an inverse
relationship between the bond price and the rate of interest. (2mks)
ii) What will the speculator hold in his/her portfolio when price rises to Ksh.
1400 assuming Ksh 1000 is the normal market price? Intuitively explain your
answer. (2mks)
QUESTION FOUR
a) i. Explain why quantity theory of money is a theory of demand for money.
(2.5mks)
ii. Show that in liquidity preference theory of demand for money, income
velocity varies positively with the rate of interest. (2.5mks)
b) Define and graphically derive the I-S curve. (5mks)
c) The goods and money markets are defined by the following equations.
Goods market
C = 50 + Y
5
2
{Consumption function}
I = 790 – 21r {Investment function}
The money market:
Mt = Y
6
1
{Transactions and precautionary demand for money}
Msp = 1200 – 18r {Speculative demand for money}
Ms = 1250 {Money supply}
Find the equilibrium levels of income and market rate of interest that clears
both markets. (5mks)
QUESTION FIVE
a) Distinguish between the following pairs of concepts:
i. Consumption and consumer’s expenditure (2mks)
ii. Durable goods and non durable goods (2mks)
b) Explain the life cycle theory of consumption (6mks)
c) Define capital-output ratio and show that net investment spending depends
on the changes in the level of output. (5mks)
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