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Econ 220 Question Paper

Econ 220

Course:Bachelor Of Commerce

Institution: Alphax College question papers

Exam Year:2010

COURSE CODE: ECON 220
COURSE TITLE: INTERMEDIATE
MACROECONOMICS
STREAM: Y2S2
INSTRUCTIONS:
1. Answer question ONE and ANY OTHER TWO questions
2. Apart from question ONE all other question carries equal marks. Marks for subdivisions
are shown in brackets.
3. Marks will be awarded to candidate who demonstrates clarity and accuracy of
presentation.
4. Diagrams should be used where helpful.

QUESTION 1
a) Consider an economy described by the following equations.

C = 1000 + 0.8Yd
[Consumption function]
T = 500 + 0.25Y [Tax function]
R = 300 [Transfer payments]
I = 1000 [Investment function]
G = 1000 [Government expenditure]
X = 100 [Export function]
M = 50 + 0.1Y [Import function]

Where:
Y = National Income
Y
d
= Income after tax

REQUIRED
a) (i) Calculate Equilibrium level of National income. ( 5 marks)
(ii) Show your answer in (a) (i) above graphically. (3 marks)
(ii) Calculate levels of consumption, Balance of Trade, and Government’s budget that
correspond to the equilibrium level of National Income. (3 marks)

b) (i) If the equilibrium level of National income (a) above exceeds full employment level
of income by 100, by how much should the government change her expenditure or taxes
to close this inflationary gap? (6 marks)
(ii) Which policy between changes in taxes and Government expenditure would you
recommend to close this inflationary? (3 marks)
c) (i) What is balanced Budget multiplier? (2 marks)
(ii) Consider and economy described by the following equations,

Y = C+I+G
G= G0
C= a0+a1Y
d

Y
d
=Y-T

Compute balance budget multiplier. (4 marks)
d) Distinguish between autonomous consumption and explain why unduced consumption is
less than disposable income. (4 marks)

QUESTION 2
(a) Explain the Relationship between actual output, potential output
and unemployment. (6 marks)
(b) Distinguish between classical and Keynesian economics. (5 marks)
(c) Using Aggregates demand aggregate supply framework, illustrate how an economy gets
out of a recession under classical economics assumptions. (9 marks)

QUESTION 3
a) Define Say’s law and explain its application in monetary economy. (6 marks)
b) Distinguish between discretionary and non-discretionary Government expenditures and
explain how the latter acts as inbuilt macro-economic stabilizers. (8 marks)
c) State and explain the limitations of Keynesian model of National Income
determination. (6 marks)

QUESTION 4
a) How does the classical theory of demand for money differ from liquidity preference
theory of demand for money? (5 marks)
b) Explain the four measures of money supply (6 marks)
c) Define and graphically derive the L-M curve. (9 marks)

QUESTION 5
(a) Explain the assumptions of Keynes theory of consumption. (6 marks)
(b) Explain the determinants of the level of consumption according to Relatives income
hypothesis. (6 marks)
(c) Critically examine the view that investment spending depends on the changes in the level of
output. (8 marks)

Econ 220 Question Paper

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