Hps2245:Intermediate Microeconomics Question Paper
Hps2245:Intermediate Microeconomics
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2012
QUESTION ONE (30 MARKS)
a) Define the following terms: i. Gross Domestic Product (GDP) (1 Mark) ii. Nominal GDP. (1 Mark) iii. Real GDP (1 Mark) iv. GDP deflator. (1Mark) v. Consumer Price Index (CPI). (1 Mark) b) Distinguish between the following (concepts) as used in macroeconomics. i. Value added and intermediate goods. (2 Marks) ii. Inventories and used goods. (2 Marks) iii. The reserve ratio and the money multiplier. (2 Marks) c) Label each of the following statements TRUE, FALSE or UNCERTAIN and explain briefly; i. Trade is always beneficial even if one country has absolute advantage in the production of all goods. (2 Marks) ii. An increase in the marginal propensity to consume leads to a decrease in output. (2 Marks) iii. An increase in the population growth rate leads to a decrease in per capital GDP. (2 Marks)
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iv. The Central Bank can increase the supply of money by selling bonds in the bonds market. (2 Marks) v. An increase of one unit in government spending leads to an increase of one unit in equilibrium output. (2 Marks) d) i) Suppose nominal GDP in years 1 and 2 are given by Y1=100 and Y2 =125 and the inflation rate equals 10%, what is the growth rate in real GDP? (3 Marks) ii) Suppose nominal GDP in years 1 and 2 are given by Y1=100 and Y2=115 and the growth in nominal per capita GDP equals 5%, what is the population growth? (3 Marks) iii) In the country of Winkam, the velocity of money is constant. Real GDP grows by 5%, the money stock grows by 14%, and the nominal interest rate is 11%. What is the real interest rate? (3 Marks)
QUESTION TWO (20 MARKS)
a) Explain the meaning of the following concepts: i. Marginal propensity to consume. (1 Mark) ii. Marginal propensity to save. (1 Mark) iii. The multiplier (2 Marks) b) Suppose that the economy is characterised by the following equations: ?? = 180 + 0.8???? ?? = 100,?? = 100,?? = 100
Solve for the following variables: i. Equilibrium GDP(Y). (2 Marks) ii. Disposable income (????). (2 Marks) iii. Consumption spending (C) (2 Marks) iv. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain (2 Marks) v. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain (4 Marks) vi. Assume that G is equal to 110, so output is given by your answer to (v). Compute private plus public saving. Is the sum of private and public saving equal to investment? Explain. (4 Marks)
QUESTION THREE (20 MARKS)
a) Place each of the following transactions in one of the four components of expenditure; consumption, investment, government purchases, and net exports. Exports briefly: i. DelMonte sells juice to Kenya Defence Forces. (1 Mark) ii. DelMonte sells juice to Hilton Hotel. (1 Mark) iii. DelMonte sells juice to Ethiopian Airlines. (1 Mark) iv. DelMonte stocks juice to sell next year. (1 Mark) b) Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years
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Year 2000 Year 2010 Good Quantity Price Quantity Price Automobiles 100 50,000 120 60,000 Bread 500,000 10 400,000 20
i. Using the year 2000 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP and a fixed-weight price index such as the CPI. (8 Marks) ii. How much have prices risen between 2000 and 2010? Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference. (4 Marks) iii. Suppose you are a member of parliament (MP) writing a ill to index pensions that is, your bill will adjust pensions to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Why? (4 Marks)
QUESTION FOUR (20 MARKS)
a) Explain briefly the three functions of money. (3 Marks) b) Which of the functions do the following items satisfy? Which do they not satisfy? Explain: i. A credit card (2 Marks) ii. A painting by Leonardo da Vinci. (2 Marks) iii. A movie ticket. (2 Marks) c) Suppose a country has a money demand function ???? ?? = ????, where ?? is a constant parameter. The money supply grows by 12 per year and real income grows by 4 percent per year. i. What is the average inflation rate? (2 Marks) ii. How would inflation be different if real income growth were higher? Explain. (2 Marks) iii. Suppose, instead of a constant money demand, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain. (4 Marks) d) Some economic historians have noted that during the period of gold standard, gold discoveries were most likely to occur after a long deflation. Why might this be true? (3 Marks)
QUESTION FIVE (20 MARKS)
Pat and Chris work 8 hours each day. They each try to make as much money as possible in this time. Pat can make a jug of wine in 2 hours and a jug of beer in 1 hour. Chris can make a jug of wine in 6 hours and a jug of beer in 2 hours. Pat and Chris are the only producers of wine in this economy. The price of wine is ???? and the price of beer is ????. The daily demand for wine is:
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???? ?? = 11 - 2 ???? ????
a) Graph the aggregate supply curve for wine. (4 Marks) b) Graph the demand curve for wine (on the same graph). (2 Marks) c) Determine the equilibrium relative price of wine (i.e, the value of ???? ???? that makes supply to equal demand). (4 Marks) d) Calculate the equilibrium values of: i. The amount of wine made by Pat. (1 Mark) ii. The amount of beer made by Pat. (1 Mark) iii. The amount of wine made by Chris (1 Mark) iv. The amount of beer made by Chris (1 Mark) e) Does either Pat or Chris have an absolute advantage in wine production? If so, which does? (3 Marks) f) Does either Pat or Chris have a comparative advantage in wine production? If so, which does? (3 Marks)
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