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Ollscoil na hÉireann, Gaillimh (^) _GX______
National University of Ireland, Galway
Semester II Examinations 2011/
Exam Code(s) 2BC1, 2BC2, 2BC3, 2BC4, 2BC5, 2BCA1,^ 1EM1, 1OA1, 4BF1, 1DB1, 3CL1, 4CL Exam(s) Bachelor of Commerce, Bachelor of Commerce (French), Bachelor of Commerce (German), Bachelor of Commerce (Spanish), Bachelor of Commerce (Italian), Bachelor of Commerce (Accounting), Eramus, Visiting Students, Bachelor of Science (Business Information Systems), Higher Diploma in Business Studies, Bachelor of Corporate Law, Bachelor of Corporate Law (International) Module Code(s) EC^213 Module(s) Macroeconomics Paper No. 1 Repeat Paper External Examiner(s) Dr.^ Pat McGregor Professor Liam Delaney Internal Examiner(s) Professor John McHale Dr. Gerard Turley Instructions: There are three sections to be answered. Please answer any three questions from Section A (45 marks), any five questions from Section B (15 marks) and any two questions from Section C (40 marks). All questions within each section carry equal marks. Duration 3 hours No. of Pages 5 Discipline Economics Course Co-ordinator(s) Gerard Turley Requirements : MCQ Release to library : Yes Handout Statistical Tables Graph Paper Log Graph Paper Other Material
SECTION A (45 marks) Answer any 3 (and only 3) Questions
- A simple Keynesian income determination model of an economy is described by the following equation AE = C + I + G + X - M where C = bYd Yd = Y – T
T = T + tY
I = I
G = G
M = mY X = X (a) Derive, from first principles, the equilibrium level of income. (10) (b) Explain the Keynesian expenditure multiplier. In (a) above, what does the value of the multiplier depend on? Derive the formula for the multiplier using the equilibrium equation from (a) above. (5)
- Consider a simple Keynesian model of the economy with the following equations: C = 400 + 0. 8 Yd
TR =^500
T = 0. 2 Y
I =^300
G =^450
X =^450
M = 0. 1 Y
(a) Calculate the equilibrium income level. (8) (b) If public sector spending on goods and services is reduced by 50, what is the new equilibrium level of income? (4) (c) Sketch the equilibrium position as in (a) or (b) above. (3) [All calculations to two decimal points] P.T.O.
SECTION B (15 marks) Answer any 5 (and only 5) Questions. Each question is worth three marks.
- Outline, in words, the circular flow of income model, with all sectors and economic agents included.
- What is the structural budget deficit? Comment on its use as a measure of fiscal policy.
- What are the differences between the assumptions of the Keynesian income determination model and the assumptions of the IS/LM model?
- Explain, using the IS/LM model, the case of the liquidity trap OR full crowding out. Use an appropriate diagram.
- Using an IS/LM/BP diagram, sketch the equilibrium position in the Mundell- Fleming model.
- Define both aggregate demand and aggregate supply. What are the two endogenous variables in the AD/AS model?
- Explain in macro terms why, in (P,Y) space, the aggregate demand curve slopes down from left to right. Give three reasons for why it is downward sloping. P.T.O.
SECTION C (40 marks) Answer any 2 (and only 2) Questions
(a) Write a short essay on pre-Keynesian (i.e. Classical) economics as it applies to macroeconomics. (8) (b) Explain and show, using the Keynesian cross diagram, how the IS curve is derived. What determines the position and slope of the IS curve? (8) (c) What does the Keynesian model of income determination predict about austerity, and, in particular, the effects of tax increases and spending cuts in the current economic climate? What are the economic arguments made in favour of austerity? (4)
(a) Using the IS/LM model and diagrams, explain the effect of the following on interest rates and GDP i. a tax increase by the Minister for Finance; ii. the Central Bank prints more money. (10) (b) Using the IS/LM/BP model, explain the impact of a monetary policy expansion in a fixed exchange rate system. Use an appropriate diagram. (10)
(a) What is the aggregate supply curve? Explain the different AS curves. (4) (b) Explain what is meant by supply-side policies. Illustrate, using the AD/AS model, the effect of a market-enhancing supply-side measure on output and price levels. (8) (c) Using the short-run AD/AS model, analyse the effects of expansionary demand management on prices and GDP. Use an appropriate diagram. (8)
