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Macroeconomics Theory Question Paper

Macroeconomics Theory

Course:Bachelor Of Quantity Surveying

Institution: University Of Nairobi question papers

Exam Year:2011

University of Nairobi
Second semester Examinations 2010/2011
Second Year Examinations for the Degree of Bachelor of Real Estate and Quantity Surveying
BRE/BQS 204: Macroeconomic Theory
Date: June 14, 2011 Time: 2.00-4.00p.m
Instructions
Answer question One and Two other questions
Question 1
a) Assume a small closed economy where the level of investment is 1000, with the following savings function: S=-400+0.25Y
i. Calculate the equilibrium level of income. [3 marks]
ii. Find the consumption function of this economy [3 marks]
iii. Calculate the expenditure multiplier in the economy [3 marks]
iv. What will be the increase in national income if investment increases by 250? [3 marks]
v. Suppose the government reduces its expenditure by 200, how much would national income increase? 3 marks]
vi. Calculate the taxation multiplier. [2 marks]
vii. How is a change in the tax transmitted? [3 marks]
b) Write short notes on the following:
i. The difference between GDP Deflator and the Consumer Price Index [4 marks]
ii. The Quantity theory of money [3 marks]
iii. The theory of liquidity preference [3 marks]

Question 2
a) Using the IS-LM Model, explain what happens to the interest rate and income when:
i. The government reduces spending/purchase [4 marks]
ii. The government lowers taxes [4 marks]
iii. The central bank reduces money supply [4 marks]
b) by the use of the Keynesian Cross and the IS-LM Model explain the term “Crowding out” effect of the government expenditure, G. [8 marks]

Question 3
a) Explain how and why monetary policy retains its effectiveness when there is perfect mobility of capital. [8 marks]
b) Explain the difference between the current and capital accounts in the balance of payments. [6 marks]
c) When is the country in internal and external balance? [6 marks]

Question 4
a) Compare and contrast the imperfect information model with the worker misperception model. Explain why each of the model ends up with the conclusion that the short run aggregate supply is upward sloping [14 marks]
b) Distinguish between:
i. Structural unemployment
ii. Frictional unemployment
iii. Natural rate of unemployment [6 marks]
Question 5
a) Increases in real GDP are often interpreted as increases in standard of living/welfare. Explain some of the problems associated with this interpretation. [6 marks]
b) A farmer who grows wheat and sells it to a miller for Kshs.2000. the miller turns the wheat into flour and sells the flour to a baker for Kshs.6000. the baker uses the flour to make bread and sells it to a school for Kshs.12000. The students consume the bread. What is the value added by each person? What is the GDP in this simple economy? [8 marks]
c) Answer True or False or uncertain. Justify your answer.
i. An increase in the prices of goods imported into the Kenyan holding all other prices and outputs fixed will end to increase the GDP Deflator in Kenya. [2 marks]
ii. The IS curve is downward sloping because as interest rate increases, both investment, I consumption, C decrease reducing the demand for goods and services. [2 marks]
iii. The LM curve is upward sloping because as output increases, money demand increases and the interest rate has to increase to match demand and supply. [2 marks]

Macroeconomics Theory Question Paper

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