Download Keynesian Income Determination Model - Introduction to Macroeconomics - Exam and more Exams Introduction to Macroeconomics in PDF only on Docsity!
Ollscoil na hÉireann, Gaillimh GX_____
National University of Ireland, Galway
Semester II Examinations, 2007/
Exam Code(s) 2BA1, 2BA6, 2FM1, 1EK2, 1OA1, 1EM Exam(s) 2 nd^ Arts, 2nd^ Arts (Public & Social Policy), 2 nd^ B.Sc. in Financial Mathematics and Economics Higher Diploma in Economic Science Occasional Eramus Module Code(s) EC Module(s) Macroeconomics Paper No. 1 Repeat Paper Special Paper External Examiner(s) Professor Cillian Ryan Internal Examiner(s) Mr. Brendan Kennelly Dr. Gerard Turley
Instructions: There are three sections^ to be answered. Please answer^ any^ two
questions from Section A (20 marks), all ten questions from Section B (20 marks) and any two questions from Section C (30 marks). All questions within each section carry equal marks. Duration 3 hrs. No. of Answer books minimum of 1 Requirements : Handout MCQ Statistical Tables Graph Paper Log Graph Paper Other Material No. of Pages 5 Department(s) Economics
Section A (20 marks) Answer any 2 (and only 2 ) Questions
- (a) A simple Keynesian income determination model of a closed economy is described by the following equation AE = C + I + G where
C = C + cYd
Yd = Y + TR – T
TR = TR
T = T
I = I
G = G
i. Derive, from first principles, the equilibrium level of income. ( 3 ) ii. What is the equilibrium condition in the Keynesian model? What is the mechanism that brings about equilibrium? ( 2 ) iii. Define the Keynesian expenditure multiplier. (1) AND (b) Now consider a simple Keynesian model of the economy with the following equations: C = 280 + 0.6Y
I = 500
G = 220
TR = 100
T = 200
M = 0.1Y
X = 340
i. Calculate the equilibrium income level. (2) ii. If transfer payments are cut by 20 , what is the new equilibrium level of income? (1) iii. Sketch the equilibrium positions as in i and ii above. Use two separate diagrams. (1) [All calculations to one decimal point]
Section B (20 marks) Answer all 10 Questions
- In the Irish National Accounts what are the two methods of measuring economic activity?
- What is an exogenous variable? What is an endogenous variable?
- What is investment expenditure in the Keynesian model of income determination and how is it specified in this model?
- If C + S = Y, what will MPC + MPS be equal to?
- Explain what is meant by a monetary accommodation of fiscal expansion.
- In the context of the IS/LM model, identify the parameters that determine the effectiveness of fiscal policy.
- What does the BP line represent in the Mundell-Fleming model?
- What is meant by imperfect capital mobility?
- What factors determine the level of potential GDP in the AD/AS model?
- List the three effects that explain the negative relationship between the aggregate price level and the level of national output demanded.
Section C (30 marks) Answer any 2 (and only 2 ) Questions
- (a) What is the purpose of the IS/LM model? How does the model differ from the simple Keynesian income-spending model? ( 3 ) (b) Use the IS/LM model to illustrate the effect on interest rates and income levels of i. a fall in government expenditure; ii. an increase in the supply of money; iii. a cut in tax. ( 9 ) (c) Using the IS and LM (and their respective slopes), explain the differences between Keynesians and monetarists with respect to fiscal and monetary policy. ( 3 )
- (a) Explain and illustrate, using the IS/LM model, the effects of a monetary policy contraction. ( 4 ) (b) Explain and illustrate, using the IS/LM/BP model, the effects of a monetary policy contraction under a flexible exchange rate regime. ( 8 ) (c) In terms of macro policy effectiveness, what are the conclusions of the Mundell-Fleming model? (3)
- (a) What is aggregate supply? Explain the differences between the alternative AS curves. ( 3 ) (b) Explain what is meant by supply-side policies. Explain and illustrate, using the AD/AS model, the effect of a positive supply-side shock on output and price levels. ( 5 ) (c) Using the AD/AS model, explain the short-run effects of contractionary demand management on prices and output. Use an appropriate diagram. ( 4 ) (d) What is the Phillips Curve? How is the Phillips Curve related to the AD/AS model? ( 3 )
