MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATIONS
2016/2017 ACADEMIC YEAR
FOURTH YEAR SECOND SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF ARTS IN ECONOMICS
COURSE CODE: ECO 411
COURSE TITLE: ADVANCED MACROECONOMICS
DATE: 9TH MAY 2017 TIME: 08:30 – 10:30HRS
INSTRUCTIONS TO CANDIDATES
Answer Question ONE and any other THREE questions
This paper consists of THREE printed pages. Please turn over.
QUESTION ONE
a) What is the contribution of the central bank to the money supply process? (7 marks)
b) Increase in the nominal wage (W) financed by taxes is unhealthy for the economy. Discuss (7marks)
c) Mathematically, Derive growth accounting equation in per capita terms (6marks)
d) Explain the use of multiplier in economic analysis (5 marks)
QUESTION TWO
a) Explain the relevance of Okun’s law on employment policy measures (5marks)
b) Explain the effect of the increase in desire to save on equilibrium income (5marks)
c) Prove that tax rate multiplier is always negative (5marks)
QUESTION THREE
(a) Using a four quadrant diagram, discuss the effect of the following on equilibrium interest rate (r) and income (Y):
i. An increase in money supply (5 marks)
ii. An increase in the price level (5marks)
(b) With reference to the income and substation effects, give an account for backward bending labour supply curve for the economy (5marks)
QUESTION FOUR
Given the following equations for a certain economy
C = 100 + 0.9Yd – Consumption Function
I = 200 – 500r – Investment function
X = 100 – Export
M = 0.12Y – 500r – Imports function
G = 200 – Government purchases
T = 0.2 – Tax Rate
L = Y – 100r – Real money demand
MS = 800 – Real Money supply
Calculate:
i. Transaction demand for money (5marks)
ii. Net export (4marks)
iii. Monetary policy multiplier (6marks)
QUESTION FIVE
A) Derive fiscal policy multiplier (7marks)
B) Given the following
C = 100 + 0.8Yd – Consumption function
I = 10 – 10r – Investment function
L = Y – 100r – Real money demand
G =10 – Government purchases
T = 0.25 – Tax rate
MS = 295 – Real money supply
Suppose equilibrium income increases by 200, by how much must real money stock increase for the new level of income to be in equilibrium. (8marks)
