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Bcom 103:Principles Of Macroeconomics Question Paper
Bcom 103:Principles Of Macroeconomics
Course:Bachelor Of Commerce
Institution: Chuka University question papers
Exam Year:2011
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 award to candidates who demonstrate clarity and accuracy of presentation.
4. Diagrams should be used where helpful.
5. Do not write on the question paper.
QUESTION 1
(a) (i) Giving examples, distinguish between Microeconomics and Macroeconomics. [3 marks]
(ii) From your answer in (a) (i) above, explain why the application of microeconomic approach can not be used to generalize about macroeconomic aggregates. [3 marks]
2
(b) Suppose there are three companies in an economy. Company A grows crops and extracts minerals from its land with no inputs from other companies. Its sales are 100 million per year half of which is sold directly to consumers and the other half is sold to companies B and C as inputs in equal amounts. Company B produces sells its entire output of 200 million to company C as inputs. Company C sells its entire output of 450 million directly to consumers.
(i) What is the value of G.D.P at market prices? [3 marks]
(ii) If there is only one indirect tax, V.A.T levied at 10% and subsidies amounting to 2 million, what is the value of G.D.P at factor cost? [3 marks]
(c) Given the consumption function of the form,
S = -a + bY
Where,
a and b = Constants
Y = Income S = Savings
(i) Derive the consumption function. [3 marks]
(ii) From the savings and consumption functions above, show that MPC + MPS = 1. Must this equality hold? Explain your answer. [3 marks]
(d) (i) “The level of consumption at higher interest rate depends on the relative strength of substitution and income effects”. Explain this statement. [3 marks]
(ii) Explain he circumstances under which the level of consumption will change even when real income is unchanged. [3 marks]
(e) Explain how money as a medium of exchange addresses the difficulties of barter trade. [6 marks]
3
QUESTION 2
(a) By aid of a diagram, explain how the Keynesian economics can be used to get the economy out of recession. [5 marks]
(b) State whether each of the following statements are TRUE or FALSE explaining your reasoning in each case.
(i) A used car sold this year is included in this year G.D.P. [2 marks]
(ii) A used car given a major tune-up at a service station is included in this year G.D.P. [2 marks]
(iii) Household expenditure on purchase of plot of land is included in GDP measurement. [2 marks]
(c) Explain the paradox, “when a person marries his or her gardener, GDP goes down”. [4 marks]
QUESTION 3
Suppose that an economy’s final output consists of four goods presented in the table below,
Good Year 1 Year 2 Year 3 Year 4 P Q P P Q Q P Q A 20 300 20 22 300 300 225 500 B 15 200 15 16 250 250 17 400 C 10 400 11 12 500 400 13 700 D 12 280 12 12 300 300 125 300
(i) Taking year 3 as the base year, compute Nominal and Real G.D.P for each of the four years, year 1, 2, 3 and 4. [8 marks]
(ii) Which of GDP measure is more useful? Explain your answer. [3 marks]
(iii) Compute Nominal and Real GDP growth rate in year 4. [2 marks]
4
QUESTION 4
(a) Show that the level of N.I is determined by and is equal to effective demand. [4 marks]
(b) Consider an economy described by the following equations,
S = 20 + 0.25 Y (Savings function)
I = 20 (Autonomous Investments)
(i) Determine the equilibrium level of national income and the corresponding level of consumption and savings. [3 marks]
(ii) Compute and interpret investment multiplier. [3 marks]
(iii) Using aggregate expenditure-aggregate production approach, show the equilibrium level of National Income is the same as that obtained in (i) above. [3 marks]
(iv) Using a diagram, show the equilibrium level of Naitonal income obtained in (i) and (iii) above. [2 marks]
QUESTION 5
(a) Given the following demand for money functions,
L1 = k(PY) [Transactions and Precautions demand for money]
L2 = h(r). [Speculative demand for money]
Show that total demand for money is inversely related to the rate of interest. A diagram necessary. [5 marks]
(b) An increase in money supply reduces the rate of interest thus stimulating investment and hence economic growth. Why shouldn’t the government then increase money supply as much as possible to eventually induce the growth of national income and wealth? [5 marks]
(c) Explain the Cost Push Inflation Myth. [5 marks]
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