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Econ 302: Intermediate Macroeconomics Question Paper
Econ 302: Intermediate Macroeconomics
Course:Bachelor Of Economics And Applied Statistics
Institution: Kenya Methodist University question papers
Exam Year:2012
KENYA METHODIST UNIVERSITY
END OF 2ND TRIMESTER 2012 (DAY) EXAMINATIONS
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : ECONOMICS AND APPLIED STATISTICS
UNIT CODE : ECON 302
UNIT TITLE : INTERMEDIATE MACROECONOMICS
TIME: 3 HOURS
INSTRUCTIONS:
Answer question one and any other two questions.
Question One
Label each of the following statements true, false or uncertain. Briefly explain your answer and use graphs where necessary.
The marginal propensity to consume has to be positive, but otherwise it can take on any positive value.
(2 marks)
Fiscal policy describes the choice of government spending and taxes and it treated as exogenous in the goods market model.
(2 marks)
The equilibrium condition for the goods market states that consumption equals output.
(2 marks)
An increase of one unit in government spending leads to an increase of one unit in equilibrium output.
(2 marks)
An increase in the marginal propensity to consume leads to a decrease in output.
(2 marks)
The central bank can increase the supply of money by selling bonds in the market for bonds.
(2 marks)
Bond prices and interest rates always more in opposite directions.
(2 marks)
Suppose that a person’s wealth is KES 50,000 and that her yearly income is KES60, 000. Also suppose that her money demand function is given by:
Md=KES Y(0.35-i)
Derive the demand for bonds. Suppose the interest rate increases by 10 per cent points. What is the effect on the demand for bonds?
(4 marks)
What are the effects of an increase in wealth on the demand for money and the demand for bonds? Explain in words.
(4 marks)
What are the effects of an increase in income on the demand for money and the demand for bonds? Explain in words.
(4 marks)
Consider the statement "when people earn more money, they obviously will hold more bonds." What is wrong with this statement?
(4 marks)
Question Two
Suppose that the economy is characterized by the following behavioral equations:-
C =160 + 0.6 yard
I = 150
G = 150
T = 100
Solve the following variables:-
Equilibrium GDP (Y)
(2 marks)
Disposable income (yd)
(2 marks)
Consumption spending (c)
(2 marks)
Solve for equilibrium output. Compute total demand. Is it equal to production? Explain
(4 marks)
Assume that g is now equal to 110. Solve for equilibrium output. Complete total demand. Is it equal to production? Explain.
(5 marks)
Assume that G is equal to 110, so output is given by your answer to (c) above. Compute private and public saving. Is the sum of private and public saving equal to investment? Explain.
(5 marks)
Question Three
Suppose that a person’s yearly income is KES 60,000. Also suppose that this person’s money demand function is given by
Md = KES Y (0.35 - i)
What is this person’s demand for money when the interest rate is 5%? 10%?
(4 marks)
Explain how the interest rate affects money demand.
(4 marks)
Suppose that the interest rate is 10%. In percentage terms, what happens to this person’s demand for money if her yearly income is reduced by 50%.
(4 marks)
Suppose that the interest rate is 5%. In percentage terms, what happens to this person’s demand for money if her yearly income is reduced by 50%.
(4 marks)
Summarize the effect of income on money demand. In percentage terms, how does this effect depend on the interest rate?
(4 marks)
Question Four
Suppose the interest rate on bonds is negative will people want to hold bonds or to hold money? Explain
(4 marks)
Draw the demand for money as a function of the interest rate for a given level of income. How does your answer to part (a) affect your answer? (Hint: show that the demand for money becomes very flat as the interest rate gets very close to zero)
(4 marks)
Derive the lm curve. What happens to the lm curve as the interest rate gets very close to zero? (Hint: it becomes very flat)
(4 marks)
Consider you lm curve. Suppose that the interest rate is very close to zero and the central bank increases the supply for money. What happens to the interest rate at a given level of income?
(4 marks)
Can an expansionary monetary policy increase output when the interest rate is already very close to zero?
(4 marks)
Question Five
Suppose that money demand is given by
Md = KES Y (0.25 - i)
Where
KES Y = KES 100.
Also suppose that the supply of money is KES 20.
What is the equilibrium interest rate?
(5 marks)
If the central bank wants to increase i by 10 percentage points (e.g. from 2% to 12%) at what level should it set the supply of money?
(5 marks)
Answer the following questions and explain your answer using words and either diagrams or equations.
What is the lm curve?
(2 marks)
Why does lm curve slope upward?
(2 marks)
What happens to the lm curve when
There is an increase in the demand for money (at a given level of income and interest rate)
(3 marks)
The interest elasticity of the demand for money rises?
(3 marks)
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