Econ 320: Advanced Macro-Economics Question Paper
Econ 320: Advanced Macro-Economics
Course:Bachelor Of Economics And Mathematics
Institution: Kabarak University question papers
Exam Year:2008
INSTRUCTIONS:
1. Answer question ONE and any other TWO questions
1. a) Given the following model:
Y = C + I + G + (X – M)
C = a + b (Y – T)
_
M = M + mY
(i) Derive the multiplier assuming tax to be lump – sum ( 5 marks)
(ii) Assuming that tax is a function of income, determine the equilibrium
level of income
(5 marks)
(b) Suppose behavioral and structural equations for an economy are given as
follows:
C = 100 + 0.80Yd
Yd = Y – T
I = 50
G = 50
T = 50
(i) Identify the endogenous and exogenous variables (2 marks)
(ii) Derive reduced form of endogenous variables (3 marks)
(iii) Find equilibrium values for each endogenous variable (3 marks)
(c) Show that the balanced budget multiplier is always equal to unity.
(6 marks)
(d) Distinguish between the following:
(i) Capital and Investment (2 marks)
(ii) Autonomous investment and Induced investment (2 marks)
(iii) Net Investment and Gross investment (2 marks)
2. a) With aid of a diagram show that according to the relative income
hypothesis, the short-run average propensity to consume is greater than the
long run average propensity to consume (14 marks)
b) Identify the shortcomings of the relative income hypothesis (6 marks)
3. a) Distinguish between
(i) Nominal exchange rate and the real exchange rate (4 marks)
(ii) Fixed exchange rate and floating exchange rate (2 marks)
b) With the help of a diagram, explain how expansionary fiscal policy abroad
can influence the real exchange rate. (7 marks)
c) Explain the impact of protectionist trade policies on the real exchange rate
(7 marks)
Suppose
b
ú
û
ù
ê
ë
é -
=
x
w x
e and x = (I – bu) wa
4. Where: e = effort
x = is the labour market condition
u = is the unemployment level
w = is the wage offered by the firm
wa = is the wage paid by other firms
b> 0; 0<?<1
(a) Show that at the equilibrium point the elasticity of effort to wages is equal
to one. (8 marks)
(b) Determine the equilibrium effort (12 marks)
5. (a) (i) Explain clearly the Fisher’s version of the quantity theory of money
(6 marks)
(ii) Identify the weaknesses of Fisher’s quantity theory of money
(5 marks)
(b) Assuming the money supply (M) is defined as the sum of currency (C)
plus deposits (D); M = C + D
Required:
Derive the money multiplier in terms of the currency and reserve ratio
(9 marks)
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