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Reg. No…………….……….
KIGALI INSTITUTE OF SCIENCE AND TECHNOLOGY
INSTITUT DES SCIENCES ET TECHNOLOGIE DE KIGALI
Avenue de l'Armée, B.P. 3900 Kigali, Rwanda
INSTITUTE EXAMINATIONS – ACADEMIC YEAR 2012/2013
FACULTY OF ARCHITECTURE AND ENVIRONMENTAL DESIGN (FAED)
MAIN EXAM
DEPARTMENT OF ESTATE MANAGEMENT AND VALUATION
YEAR: 1
SEMESTER: 2
EMV3121: INTRODUCTION TO MACROECONOMICS
DATE:
/ /2011
DURATION: 2 HRS
MAXIMUM MARKS: 60
INSTRUCTIONS
1.
2.
3.
4.
5.
This paper contains Four(4) questions
Question One is COMPULSORY and carries 30 Marks.
Answer questions One and any other Two (2) from the remaining Three (3).
Do not forget to write your registration number
Do not write any answer on this question paper
Note: You are required to strictly abide by ALL examination rules printed on the answer booklet.
QUESTION 1 COMPULSORY [30 Marks]
a) List and explain any four important reasons justifying the existence of National Income data to a
growing economy like Rwanda
[10 Marks]
i.
Gives a clear picture of the economy: The national income accounts or social accounts give a
clear picture of the economy regarding the GDP, national income, per capita income, saving
ratio, production, consumption, disposable income, capital expenditure, etc. It gives a clear
view of the health of the economy and the way in which it functions. It also gives a view on
the living standard of the people.
ii.
iii.
Helps in the promotion of efficiency and stability of the economy: To foster the economic
growth, any government has to see what she has achieved in the past and what has to be done
in the future. For this purpose, the preparation of national income accounts is quite
inevitable for the promotion of economic efficiency and stability. It helps the government to
set the national priorities, such as education, inflation, unemployment, defence, social
development, and industrialization, etc.
Measurement of economic welfare: Measurement of economic welfare is another purpose of
the preparation of social accounts. Through social accounting, we can know at a glance to
what extent the masses are better off than at the time when planning started.
iv.
Shows interrelationship of different sectors of the economy: Through the study of national
income accounts, the reader is in a position to inter-relate different sectors of the economy.
v.
Used in the formulation of monetary, fiscal and trade policies: The national income accounts
are very essential for the statesmen, governments, and politicians, because they help them to
efficiently formulate different economic policies, including monetary policy, fiscal policy and
trade policy. In the absence of national income accounts, the economic planning would be
disastrous.
b) Briefly explain why money is considered to be a store of value. For this function to be achieved,
what underlying conditions must prevail?
[5 Marks]
Money enables people to delay potential purchases to the most convenient time by providing them
with a convenient way to store their purchasing power. However, to act as a store of value:
– It must be capable of being reliably saved, stored, and retrieved and be predictably
usable upon retrieval
– The value of the money must also remain stable over time
c) Outline and briefly explain any Six types of inflation that you know of
[9 Marks]
 Creeping Inflation: This is also known as mild inflation or moderate inflation. This type
of inflation occurs when the price level persistently rises over a period of time at a mild
rate. When the rate of inflation is less than 10 per cent annually, or it is a single digit
inflation rate, it is considered to be a moderate inflation.

Galloping Inflation: If mild inflation is not checked and if it is uncontrollable, it may
assume the character of galloping inflation. Inflation in the double or triple digit range of
20, 100 or 200 percent a year is called galloping inflation..

Hyperinflation: It is a stage of very high rate of inflation. While economies seem to
survive under galloping inflation, a third and deadly strain takes hold when the cancer of
hyperinflation strikes. Nothing good can be said about a market economy in which prices
are rising a million or even a trillion percent per year. Hyperinflation occurs when the
prices go out of control and the monetary authorities are unable to impose any check on
it. Germany had witnessed hyperinflation in 1920’s.

Stagflation: It is an economic situation in which inflation and economic stagnation or
recession occur simultaneously and remain unchecked for a period of time. Stagflation
was witnessed by developed countries in 1970s, when world oil prices rose dramatically.

Deflation: Deflation is the reverse of inflation. It refers to a sustained decline in the price
level of goods and services. It occurs when the annual inflation rate falls below zero
percent (a negative inflation rate), resulting in an increase in the real value of money.
Japan suffered from deflation for almost a decade in 1990s.
Demand Pull Inflation: Caused by increase in aggregate demand. This increase is caused
by increased private and government spending
Cost Push Inflation: Is caused by a drop in aggregate supply which is caused by
increased prices of inputs. It is also called as Supply Shock Inflation.
Others classifications include, commodity inflation, wage inflation, monetary inflation,
fiscal inflation, foreign exchange inflation etc



d) Differentiate between the terms ‘trade Quota’, ‘exchange control’ and ‘dumping’ as used in
international trade
[6 Marks]
i.
Quota: a limit imposed on quantity of goods that may be imported over a given period of
time
ii.
Exchange control system: regulation that restricts domestic residents from accessing
foreign exchange. Can require permission from central bank
iii.
Dumping: selling products in foreign markets more cheaply in the domestic market
QUESTION 2 [15 Marks]
a) Outline and briefly explain any three problems of aggregation in the study of macroeconomics
[10 Marks]
In studying the economy in its entirety on the basis of macroeconomic aggregates, the following
challenges are usually met
i.
Difficulty in finding an appropriate unit of measurement, e.g. total output of goods and
services since there are millions of different types of goods and services in the economy
ii.
The problem of value measurement in instances where prices are changing, since value
has dual components – price and quantity which many times is difficult to separate
iii.
Aggregates also hide their constituent elements e.g. an increase in total output tells
nothing about who receives the output or the distribution factor.
b) Macroeconomics is said to be concerned with the big issues. List and briefly explain any five of
these including their implications
[5 Marks]
To understand these macroeconomic problems, one needs to identify, measure and analyze the
main aggregates of the economy. These broad aggregates/’big issues’ include
i.
The Total output of goods and services in the economy-(national income)
ii.
iii.
iv.
v.
vi.
Total employment and unemployment
The aggregate demand for, and total supply of output
The balance of payments
The rate of economic growth
The general price level
[All explained in detail]
QUESTION 3 [15 marks]
a) One of the key functions of money is a ‘unit of account’. Briefly explain this notion.
[3 Marks]
Money is a standard numerical unit of measurement of the market value of goods, services, and
other transactions. A unit of account is a necessary prerequisite for the formulation of
commercial agreements that involve debt.
b) List any briefly explain any three required conditions for the function in (a) above to be achieved
effectively.
[6 Marks]
As a unit of account, money must be:
– Divisible into smaller units without loss of value;
– Fungible, that is, one unit or piece must be perceived as equivalent to any other.
– Verifiably countable. A specific weight, or measure, or size to be
c) Explain any three motives for liquidity preference
[6 Marks]
Liquidity preference refers to the desire to hold money in cash or bank deposits. The motive to do
so include:
i.
Transaction motive: this is holding money in cash to facilitate day-to-day transactions. It
is assumed that income is received once at a time but the expenditure is continuous,
hence money is held to offset these continuous expenditures.
ii.
Speculative motive: Also referred to as speculative demand. This is where current
demand for money depend on expectations of the future occurrences e.g. future rise in
lending interest rates can encourage speculators to hold money in cash to meet such
dealings
iii.
Precautionary motive: Precautionary motive arise out of consumers desire to provide for
unexpected and unplanned expenditures. Money kept to meet such unforeseen
eventualities constitutes precautionary demand. This however depends on the level of
income. The higher the level of income, the higher is the sum put aside to meet these
needs and vise versa.
iv.
Finance motive: Money held in cash to finance or sustain ongoing needs/demands such
as ongoing investments.
QUESTION 4 [15 Marks]
a) Define a commercial bank
[ 2 Marks]
A commercial bank is a financial institution, usually licensed by government, whose primary
function is to provide financial services to customers, while enriching its investors. Commercial
banks are regulated by government in their functions
b) Explain the meaning of the terms ‘expansionary’ and ‘restrictive’ monetary policy. List any Six
tools that the National Bank of Rwanda (BNR) can use to implement the national monetary
policy
[8 Marks]
Monetary policy is the process by which a government, central bank, or monetary authority
manages the money supply to achieve specific goals.
Monetary policy can be expansionary (geared towards increasing money supply) or restrictive
(aimed at reducing money supply)









Interest rate policy
Currency purchases or sales
Increasing or lowering government borrowing
Increasing or lowering government spending
Lending ceilings
Open market operations (OMO)
Special deposits by commercial banks
Manipulation of exchange rates
Raising or lowering bank reserve requirements [Any 6]
c) Explain the principle of money creation using fractional reserve lending
[5 Marks]
Money creation through the fractional reserve system: Fractional-reserve banking creates money
whenever a new loan is created. The ultimate amount created depends on the reserve ratio.
For example, If an initial deposit of 5,000,000 is made, with the reserve ratio R, of 20%, the total
money created is equal to
Initial deposit (I) x Multiplier(M).
Where the Multiplies = 1/R.
Hence in the above case, total money deposits created = 5,000,000 x 5 = 25,000,000.
Reg. No…………….……….
KIGALI INSTITUTE OF SCIENCE AND TECHNOLOGY
INSTITUT DES SCIENCES ET TECHNOLOGIE DE KIGALI
Avenue de l'Armée, B.P. 3900 Kigali, Rwanda
INSTITUTE EXAMINATIONS – ACADEMIC YEAR 2012/2013
FACULTY OF ARCHITECTURE AND ENVIRONMENTAL DESIGN (FAED)
SUPPLEMENTARY EXAM
DEPARTMENT OF ESTATE MANAGEMENT AND VALUATION
YEAR: 1
SEMESTER: 2
EMV3121: INTRODUCTION TO MACROECONOMICS
DATE:
/ /2011
DURATION: 2 HRS
MAXIMUM MARKS: 60
INSTRUCTIONS
1.
2.
3.
4.
5.
This paper contains Four(4) questions
Question One is COMPULSORY and carries 30 Marks.
Answer questions One and any other Two (2) from the remaining Three (3).
Do not forget to write your registration number
Do not write any answer on this question paper
Note: You are required to strictly abide by ALL examination rules printed on the answer booklet.
QUESTION 1 COMPULSORY [30 Marks]
a) Distinguish between formal impact and effective impact of a tax
[5 Marks]
Formal tax incidence refers to an individual or firm on whom the initial impact of the tax falls.
Effective Incidence on the other hand refers to the final resting place of a tax. This therefore is a
more important concept from an economic point of view when considering the ultimate effect of a
tax on say distribution of income
b) What are the advantages and limitations associated with macroeconomics study? [10 Marks]
Importance of Macro-Economics is as below
1. It is helpful in understanding the functioning of a complicated economic system. It also studies
the functioning of global economy. With growth of globalization and WTO regime, the study of
macro-economics has become more important.
2. It is very important in the formulation of useful economic policies for the nation to remove the
problems of unemployment, inflation, rising prices and poverty.
3. Through macro-economics, the national income can be estimated and regulated. The per
capita income and the people’s living standard are also estimated through macro-economic
study. It explains the fluctuations in national income, per capita income, output and employment.
Limitations of Macro-Economics:
1. Individual is ignored altogether. For example, in macroeconomics national saving is increased
through increasing tax on consumption, which directly affects the consumer welfare.
2. The macro-economic analysis overlooks individual differences. For instance, the general price
level may be stable, but the prices of food grains may have gone spelling ruin to the poor. A steep
rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the
average prices were steady. The agriculturists may be ruined. While speaking of the aggregates,
it is also essential to remember the nature, composition and structure of the components.
c) Define international trade. Why do countries carry out this kind of trade?
[5 Marks]
International trade refers to the exchange of capital, goods, and services across international
borders or territories of the countries involved. It is trade between countries.
This kind of trade is conducted with the aim of maximizing benefits of specialization, diversity,
interrelationships etc. Countries are usually not endowed with all needed resources, hence
international trade allows for the sharing, acquisition or exchange of these resources. It is
usually controlled by way of tariffs, quotas etc?
d) Suppose the economy of Rwanda was to be hit by double digit inflation, what would be the likely
effects on the real estate sector?
[10 marks]
Possible effects would include
 Due to the decrease in the real value of money and other monetary items over time, this
would make it difficult to acquire items necessary for the development of the sector such
as building materials







Uncertainty about future of the sector and the economy as a whole
Inflation may discourage investment and saving, investors would be discouraged to
invest in Rwanda
Vacancy rates might increase as demand for property falls with businesses shifting to
other more stable countries
Reduction in overall economic productivity, this can lead to unemployment in the sector
High inflation may lead to shortages of goods if consumers begin hoarding. This would
divert money from the sector to meet such basic goods
Lending institutions e.g. banks would loose
Government would looses in taxes from tax payers, unless rates are revised
QUESTION 2 [15 Marks]
a) Differentiate between direct taxes and indirect taxes
[4 Marks]
Direct taxes: this category is imposed on income, wealth, spending power or any of these tax
bases
Indirect taxes: Indirect taxes are levied on goods and services and are often included in the price
of the product. The tax base is the goods and services itself
b) Why do governments formulate and implement fiscal policies?
[5 Marks]
The primary role of government in almost all economies is to maintain stability in the economy as
well as safeguarding citizens’ welfare. The undertaking of these responsibilities can sometimes
involve massive spending by government depending on the situation. The money to finance the
government’s spending is sometimes realized through taxation, printing more money, user
charges etc. Fiscal policy is therefore concerned with and guides government spending and
taxation
c) Briefly explain the following principles of taxation
i.
Economy principle
[3 Marks]
The cost of collection should be minimal in relation to the tax yield. The total amount of
the tax collected should considerably exceed the cost of carrying out the collection
exercise; otherwise it would be utterly meaningless and not viable
ii.
Convenience principle
[3 Marks]
The method, manner and time for payment should be convenient to the tax payer e.g. If
the tax payer is a farmer, the time of collecting the taxes should be after harvest is done
and not during planting period. Similarly, the approach and the manner in which the
exercise is conducted should be realistic and acceptable if it is to be successful
QUESTION 3 [15 Marks]
Write short notes on the following as used in macroeconomics
a) Fisher’s quantity theory of money
[5 Marks]
The quantity theory of money states that ‘the average price of transactions in an economy is
proportional to the nominal quantity of money in circulation’. According to this theory, money is
held for making payment for current transaction. This relationship is summarized in Fisher’s
equation of exchange
Demand for money = transaction demand
According to Fisher
M α P
MV = PT
MV = PT
–
–
–
–
[Where V and T are constant]
(Fisher’s equation of exchange)
where M is the nominal stock of money,
V is its velocity (how many times a unit of money turns over during a period of time),
P is the price level and
T is number of transaction
b) Excess burden of a tax
[5 Marks]
Excess burden: refers to net fall in welfare (or deadweight loss) as a result of imposing the tax.
It’s a notion that tax on income, capital and commodities distort choice in such a way that the
total loss by the tax payer is greater than the money burden of the tax
Total loss > Money burden
Dx-Dx is the demand curve for good X
Sx is the supply curve before tax and (Sx+T) is the supply curve after taxation – all made
horizontal for simplicity
P1P0RS represents the tax revenue
The shaded area RST represents excess burden or dead weight loss of the tax
STQ0Q1 is the value the society places on Q0Q1. However, this amount is greater than the
resource cost of producing it RTQ0Q1 by RST (the shaded area)
c) The theory of absolute advantage
[5 Marks]
A country is said to have an absolute advantage in the production of a commodity if it can
produce it more efficiently than any other country. This implies that the production in the country
yields more output for a given unit of inputs
Country
Inputs
Output
A
100
240
B
100
265
Country B is said to have absolute advantage in the production of the good in the above case
since it produces more units of output with the same units of inputs.
QUESTION 4 [15 Marks]
a) Briefly explain the three methods of measuring National Income.
[3 Marks]

Product/output approach (O): National output is found by adding up the value of all final
goods and services produced by firms during the year. Intermediate goods are omitted to
avoid double counting

Expenditure approach (E): National expenditure is found by adding up total value of
spending on final goods and services during the year. National expenditure therefore
includes total consumption, investment, government expenditure and net export

Income approach (Y): This includes all incomes earned by factors of production during a
year.
b) With respect to Keynesian classical economics, explain with illustrations:
i.
Equilibrium national income at full employment
[6 Marks]
When national income is in equilibrium at full employment, no gap is said to exist. All resources
are said to be employed
ii.
Deflationary gap and suggest any three remedial measures that can be used to address it.
[6 Marks]
Deflationary gap is the amount by which aggregate demand must be increased to raise the
equilibrium national income to full level of employment. It occurs when national income is in
equilibrium at less than full employment of resources
Remedies
 Deflationary gap can be closed by increasing aggregate demand through
 Increasing government spending. The increase in total injection will have a
multiplier effect on income
 Reducing taxes (restrictive fiscal policy) which stimulates consumption by increasing
disposable income