Download econ 210: introduction to macroeconomics

KABARAK
UNIVERSITY
UNIVERSITY EXAMINATIONS
2012/2013 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF SCIENCE IN
ECONOMICS AND MATHEMATICS
ECON 120: INTRODUCTION TO MACROECONOMICS
DAY: FRIDAY
DATE: 14/12/2012
TIME: 2.00 – 4.00 P.M.
STREAM: Y1S2
INSTRUCTIONS:
1. Question ONE is compulsory
2. Attempt any other two (2) Questions
3. Question ONE carries 30 marks while the other questions carry 20 marks each
4. Concise answers and well-labeled diagrams are encouraged
QUESTION ONE (COMPULSORY)
(30 marks)
A) Write brief notes on the following:
i. Macroeconomic problem
(1 mark)
ii. Black economy
(1 mark)
iii. Potential output
(1 mark)
iv. Macroeconomic equilibrium
(1 mark)
v. Classical unemployment
(1 mark)
B) Differentiate between the following pairs of concepts (where applicable, use
appropriate diagrams and/or illustrations):
i. Double-counting and value-added in national income accounting
(2 marks)
ii. Liquidity preference and speculative demand for money
(2 marks)
iii. Galloping inflation and hyper-inflation
(2 marks)
iv. Hardcore unemployment and structural unemployment
(2 marks)
v. Capital formation and human capital
(2 marks)
C) Show that a country can have economic growth without economic development but
that such a country cannot have economic development without economic growth
(5 marks)
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D) Given the following:
Income (Y) Consumption (C)
APC
APS
0
20
40
50
80
80
120
110
160
140
200
170
Define and calculate:
i. Average propensity to consume (APC)
ii. Average propensity to save (APS)
iii. Marginal propensity to consume (MPC)
iv. Marginal propensity to save (MPS)
vi. Show Keynes’ Psychological Law from the above table
MPS
MPC
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
QUESTION TWO
a) Define aggregate demand
(1 mark)
b) Why did Keynes consider demand management by governments to be important in an
economy?
(3 marks)
c) Use demand management to show how an inflated economy can be corrected
(5 marks)
d) Are Keynes’ prescriptions for government intervention in the economy applicable in
modern times? Explain your answer
(3 marks)
e) Given:
C = 1000 + 0.85Y
i. Derive the savings function and graph it
(3 marks)
ii. Derive the Marginal propensity to save (MPS) and explain it
(3 marks)
iii. What is the relationship between MPC and MPS?
(2 marks)
QUESTION THREE
a) Consider the consumption function given by the following equation:
C = α0 + α 1Y
Where:
C = Consumption expenditure,
Y = Income, and
α0 and α1 are constants
Define the constants α 0 and α 1 and graph the consumption function
b) Suppose that an economy is described by:
C = 1000 + 0.8Y
I = 500
Where:
C = Consumption expenditure,
Y = Income, and
I = Investment
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(4 marks)
Required:
i) Determine the equilibrium level of national income and level of consumption at this
level of income
(3 marks)
ii) If investment increases by 100, what is the new level of equilibrium national
income and consumption expenditure? Graph the equilibrium level of national
income.
(3 marks)
iii) Compute the marginal propensity to consume (MPC) and the interpret your results
(2 marks)
iv) Define the simple Keynesian multiplier; use the information provided above to
compute the simple Keynesian multiplier and interpret your results (4 marks)
v) Given:
Y=C+I
Where:
Y= Income, C= Consumption and I = Investment, and C = Co + cY
Show that:
∆Y = k ∆
(4 marks)
QUESTION FOUR
a) Suppose you are one of the aspiring Presidential aspirants and that during the live
televised interviews you are given a few minutes to market your manifesto to
Kenyans. Discuss the macroeconomic challenges that you would highlight in your
answer and the proposed solutions to the stated challenges
(15 marks)
b) Do you consider per capita income an appropriate measure of welfare? Explain your
answer
(5 marks)
QUESTION FIVE
“Money is a necessary evil” Discuss.
(20 marks)
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