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Econ 120: Introduction To Macroeconomics December 2008 Question Paper

Econ 120: Introduction To Macroeconomics December 2008

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2008

COURSE CODE: ECON 120
COURSE TITLE: INTRODUCTION TO MACROECONOMICS
STREAM: Y1S2
INSTRUCTIONS:
1. Question one is Compulsory
2. Attempt any other TWO (2) questions
3. You are encouraged to be concise and avoid ambiguous answers.
4. All diagrams should be fully labeled.

Question ONE
a) Explain how the following terms are used in economics:
i) National income (1 mark)
ii) Unemployment (1 mark)
iii) Economic development (1 mark)
iv) Foreign exchange (1 mark)
v) Investment (1 mark)
b) Differentiate between the following paired concepts:
i) Cost-push inflation and demand-pull inflation (2 marks)
ii) Disguised unemployment and frictional unemployment (2 marks)
iii) Autonomous consumption and induced consumption (2 marks)
iv) Injections and leakages in the circular flow of income (2 marks)
v) Intermediate output and final output (2 marks)
c) i) State Keynes` Psychological Law (1 mark)
ii) Keynes prescribed demand management as a solution to both inflationary and
deflationary situations in an economy. Discuss how the government can use
demand management to solve the problems of inflation and deflation.
(10 marks)
iii) In what ways does demand management fail to achieve the desired results in
developing countries? (4 marks)
QUESTION TWO
a) Given a consumption function of the following form:
C = a +1 a2Y
Where
a1
and a2
are constants
Y = Income
C = Consumption expenditure
i) Define the coefficients a1
and a 2 (2 marks)
ii) Explain a2 Y (1 mark)
iii) Plot the consumption function (2 marks)
b) Consider an economy described by the following equation
C= 100 + 0.5 Y
I = 75
Where:
Y = Income
I = Investment expenditure
C = Consumption expenditure
Required:
i) Compute the equilibrium level of national income and the level of consumption
(4 marks)
ii) If investment expenditure increases by 25, what will be the new equilibrium national
income and level of consumption? (4 marks)
iii) Plot your results in (ii) above (2 marks)
iv) Assuming you are running a firm that sells consumer goods. The Government of
Kenya has just announced a reduction in the rate of income tax, thereby giving many
consumers a boost in their disposable incomes. Would this effect be different if the
marginal propensity to consume was 0.98 instead of 0.6? Explain (5 marks)
QUESTION 3
a) Explain the relationship between marginal propensity to consume and disposable
income. What does this relationship imply concerning the saving habits of different
income groups? (5 marks)
b) Other than income, explains at least five other factors that influence consumption
expenditure. (10 marks)
c) Discuss the various ways in which marginal propensity to consume would find
relevance in real economic situation. (5 marks)
QUESTION 4
a) Define inflation (2 marks)
b) Explain two theories of inflation (8 marks)
c) In what ways would you consider inflation as an economic evil? (5 marks)
d) What are the policy prescriptions of inflation? (5 marks)
QUESTION 5
Rising unemployment has been described as one of the major macroeconomic issues affecting
developing countries such as Kenya. Define unemployment; indicate the various types of
unemployment existing in Kenya and prescribe possible solutions to the unemployment
problem.
(20 marks)

Econ 120: Introduction To Macroeconomics December 2008 Question Paper

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