MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATIONS
2015/2016 ACADEMIC YEAR
FOURTH YEAR SECOND SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF ARTS ECONOMICS
COURSE CODE: ECO 411
COURSE TITLE: ADVANCED MACROECONOMICS
DATE: 4TH MAY 2016 TIME: 8.30-10.30
INSTRUCTIONS TO CANDIDATES
1. Answer Question ONE and any other THREE questions
This paper consists of TWO printed pages. Please turn over.
QUESTION ONE
(a) Explain the conditions that make wages sticky (6mks)
(b) Explain the counter reactions of equilibrium real business cycle theory under rational expectations on the Lucas model (4mks)
(c) Suppose that consumption is reduced by the interest rate. Explain the effect on IS curve
(3mks)
(d) Assume that there is perfect mobility of capital, How does the imposition of a tariff affect the exchange rate, output and the current account? (8mks)
(e) Suppose a linear production function is given as Y=f (K, L). By using this production function, derive the equation measuring the income growth rate. (4mks)
QUESTION TWO
(a) Distinguish between warranted, actual and natural rates of growth in the Harrod-Domar growth model. (6mks)
(b) Derive warranted rate of growth from the model. (3mks)
(c) Explain the role of technological progress in the process of increasing saving and investment within the endogenous growth theory. (6mks)
QUESTION THREE
(a) Explain the relationship of the actual real wage, employment, output to the ratio of actual price to expected price in the Lucas supply curve of imperfect information. (9mks)
(b) Illustrate the effect of an increase in money stock on output with
(i) Anticipated money (3mks)
(ii) Unanticipated money (3mks)
QUESTION FOUR
(a) Show that a given change in money stock has a larger effect on output the less interest sensitive is demand for money (5mks)
(b) Explain the pattern of declining output and declining interest rates using the IS-LM model for an economy experience a fall in treasury bill rate and a deeper recession (6mks)
(c) Explain the effect of the IS curve slope as a factor in determining the working of monetary policy (4mks)
QUESTION FIVE
(a) Given the following structural equations in an ope economy. Where the aggregate spending by domestic residents is
A=C+cY-bi
and net exports,
NX=X-Q
import spending
Q=M+mY
where M is autonomous import spending. Exports are given and are
equal to
X=X-
Suppose that; C=400, c=0.8, i0=5%, b=30, M=0, m=0.2, X=250
(i) Calculate the equilibrium level of income (4mks)
(ii) Calculate the balance of trade (2mks)
(iii) Calculate the open economy multiplier (2mks)
(iv) What are the assumptions made above (2mks)
(b) Discuss the frictionless neoclassical model of the labor market. (5mks)
