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Macroeconomic Theory I Question Paper
Macroeconomic Theory I
Course:Master Of Economics
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF MASTER OF
ECONOMICS
EET 501: MACROECONOMIC THEORY. I
DATE: Thursday 26th November 2009 TIME: 9 0.00am - 12.00Noon
INSTRUCTIONS:
Answer any FOUR questions. All questions carry equal marks.
1.
a)
Using a diagram, show and explain tax, consumption and saving functions. [3marks]
b)
Show graphically the equilibrium level of income and explain what happens if there is increase in the desire to save. [4marks]
c)
Derive mathematically the fiscal policy multiplier and explain how the fiscal policy can be used to regulate the level of output and interest rate in the economy. [8marks]
2.
a)
Show and explain money and market equilibrium and derive the LM curve. [7marks]
b)
Explain how the economy moves towards equilibrium if it is operating from a point of disequilibrium. [8marks]
3.
a)
Assuming a small open economy, show and explain how fiscal polity at home and abroad affects the trade balance. [6marks]
b)
Using Mundel-Fleming model, explain the effectiveness of monetary and fiscal policy in influencing aggregate income of an economy under flexile exchange rate. [6marks]
c)
Explain the effect of trade under fixed exchange rate system. [3marks]
4.
a)
Given that an individual lives for two periods and that he/she inherits no assess and leaves no bequest,
i)
Show that savings in period one equals the opposite of saving in period two. [1mark]
ii)
Show and explain his/her inter temporal budge constrain. [2marks]
b)
Consider a situation where the individual starts life with asses and leaves some bequest. Show and explain his/her inter temporal budget constrain. [2marks]
c)
Explain how different types of income shocks affect consumption according to permanent income hypothesis. [4marks]
d)
Explain the life cycle hypothesis and why it may not explain consumption behaviour in your country adequately.
5.
a)
Differentiate between the following models of investment, the accelerator model, the adjustment cost approach and the q-theory. [10marks]
b)
Explain various policies which can be adopted to increase the level of private investment in your country. [5marks]
6.
a)
Explain the assumption underlying the Ramsey-Cass-Koopmans Model and show the planner problem and the constraints he faces. [3marks]
b)
Consider an individual who lives for two periods and whose utility is given by
1-?
C
1
1-?
C
it
2
U
+
t
, ? > 0 and ? > 1
-
1 1-? 1+ ? 1-?
Let P1 and P2 denote the price of consumption in the two periods and let w denote the price of value of the individual lifetime income. Thus the budget constraints is P1 C1t P2 C2t+1= w. What is the individual utility maximizing choice of C1 and C2 given P1, P2 and w. [4marks]
c)
Given kt+1 = a 1 ( - a )K 1 ( + n 1 )( + g) 2 + ? 1
i)
explain using phase diagram, the dynamics of k. [5marks]
ii)
Explain what happens to equilibrium k if ? decreases. [3marks]
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