SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT
ECF110 - INTRODUCTION TO MACROECONOMICS
MID-SEMESTER EXAMINATION
THURSDAY, 28TH MARCH 2013
15:00- 17:00 HOURS
Time allowed: 3 HOURS plus 5minutes reading time
Instructions to Candidates:
1. Check that you have the correct examination paper in front of you.
2. There are Two (2) Sections in this paper. Section A: IS COMPULSORY, answer ANY THREE (3)
questions in section B.
3. All questions must be answered in the answer sheet only.
4. Write down the number of questions that you have answered on the cover of the examination
answer sheet.
5. Begin each question on a new page.
6. Non-Programmable Electronic Calculators are allowed
7. No books, files or other mechanical / electronic aids are permitted.
8. There shall be no form of communication between students during the examination. Any students
caught doing this will be disqualified.
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO
1
SECTION A. COMPULSORY
QUESTION 1
a)
I. What are the components of the consumption function? By way of diagram show how
an increase in disposalincome affects Aggrade demand
II. In Equilibrium income model, what is Autonomous expenditure and by way of diagram
show how that affects the aggregate demand function.
III. What is the Autonomous Expenditure Multiplier and what is its impact on aggregate
demand.
(5X3=15 Marks)
b) Given the following
Autonomous Consumption (Co) = K60
Marginal Propensity to save (MPS) = 0.2Y
Investment = 100
Government Exp = 200
Exports = 120
Imports = 100
Marginal Propensity to Import (M) = 0.10
I. What is the reduced form of the equation for equilibrium Income (5 Marks)
II. Solve for national income equilibrium and what is the level of consumption (10 Marks)
III. What is the Autonomous expenditure multiplier (10 Marks)
TOTAL: 40 MARKS
2
SECTION B: ANSWER ANY THREE (3) QUESTIONS
QUESTION 2
A. In the context of circular flow of income, discuss the three ways of measuring national
income ( 5 Marks)
B. What are the difficulties encountered in measuring national income ( 5 Marks)
C.
Period 1 Period 2
2 Bags of 50kg bags @ K90| Bag K100| Bag
2 Litre of Cooking Oil @ K20| Litre K30 |Bag
10 Loaf of Bread @ K5 | Per loaf K7 | Bag
Transport K 150 | Month K170
Education K 300 | Month K 300
Medical Bill K 120 | M K 100
I. Given the following markets basket and prices for the relevant goods, calculate the
consumer price index (7 Marks)
II. What is the difference between the consumer price index and the deflator (5 Marks)
TOTAL: 20 MARKS
QUESTION 3
a. Explain what the transaction, speculative and precautionary motives for demand for
money (8 Marks)
b. To what function of money is each of them related
c. What factor influences the holding of money under each of the motives for demand for
money ( 5 Marks)
3
TOTAL: 20 MARKS
QUESTION 4
a. How does the central bank influence the level of money supply in the economy
(6 Marks)
b. Why would the central bank want to reduce interest rate and how is this achieved
(6 Marks)
c. How do Commercial banks engage in money creation and what is the relevance of the
stationary reserve requirement to deposit creation by commercial banks. (8 Marks)
TOTAL: 20 MARKS
QUESTION 5
In a recession, Government can decide to increase Government Expenditure as a way of
stimulating the economy.
I. With the aid of diagram show the impact of increased government expenditure on
prices and interest rates in the economy. (15 Marks)
II. What do you understand by the concept of the budget constraint (5 Marks)
TOTAL: 20 MARKS
QUESTION 6
In a period of Boom, Government may undertake a contractionary fiscal Stance. What
measures will be undertaken to accomplish this and through which demand variables will
the impact be delivered. TOTAL: 20 MARKS
END OF MIDSEMESTER EXAMINATION PAPER
