UNIVERSITY EXAMINATION 2017/2018

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

BCOM/BBM/BEC/BECF/BECS/BSFS/BDS/BEC
REGULAR

UNIT CODE: BED3104 UNIT TITLE: INTERMEDIATE

MACROECONOMICS

DATE: AUGUST 2018 SPECIAL/SUPPLEMENTARY TIME:2 HOURS

INSTRUCTIONS:
 ANSWER QUESTION ONE AND ANY OTHER TWO QUESTIONS.

Question One
a) Discuss the following economics theories. Give relevant illustrations and
examples:
(i) Liquidity preference theory. (4 Marks)
(ii) The permanent income hypothesis. (4 Marks)
(iii) Keynesian consumption functions. (2 Marks)

b) Assuming money supply is 1400, consumption equation is represented as C=120

+ 0.7 (Y-T), investment equation is I = 200 – 10r, where r is the real interest
rate while taxes (T) and Government expenditure are: 200 and 400 respectively
the real money demand function is expressed as m/p= 0.1y -100r count in
million:
(i) Solve for equilibrium real output and equilibrium interest rate.
(6 Marks)

(ii) If the autonomous investment increases by 300, compute the investment

multiplier and analyze the new impact on income and consumption.

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 (iii) Kenyas ministry of finance is keen in ensuring that vision 2030 is realized.
Discuss some of the key projects that you behave can more the economy
towards this target.

Question Two
Kenya’s Central Bank and the treasury are the macroeconomic policy authorities in
Kenya. They share a twin purpose to induce, and manage the country’s economic
growth. Discuss the tools they use and how they impact trends in the economy.
(20 Marks)

Question Three
a) Using the IS/LM model, explain clearly the impact of an expansionary monetary
policy in a closed economy. (10 Marks)

b) Identify and explain various types of inflation and their effect in the economy.
(10 Marks)
Question Four
a) Discuss the motives of holding money according to liquidity preference.
(10 Marks)

b) Discuss the absolute income hypothesis. (10 Marks)

Question Five
a) Explain the various factors that results into the shift of the curve. (6 Marks)

b) The following equation describe a certain economy;

C = 400 + 0.75 Yd
I = 200 – 100r
T = 70 + 0.2 Y
G = 100
X = 10
M = 150 + 0.06Y
Ms = 4000
MD = 0.2Y – 10r

Required;
(i) Derive the IS & LM models. (5 Marks)
(ii) Calculate the equilibrium Y, C, T, M & I. (5 Marks)

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