COURSE TITLE: INTERMEDIATE MACROECONOMICS

COURSE CODE: ECN 321

INSTRUCTION: ANSWER TWO QUESTIONS (Question 1 is compulsory).
Question One
i. Distinguish between crowding-out and crowding-in effects and suggest fiscal policy
measures that could result in crowding-in effect on private investment.
ii. Using the IS-LM/AD-AS diagram, describe the short-run and long-run effects of the
following on national income, interest rate, price level, consumption, investment and real
money balances:
a) An increase in taxes
b) A house price boom
c) A fall in corporate profit
d) Expectation of a future increase in unemployment
e) A programme of investment in new ATMs
f) Financial deregulation leading to the abolition of reserve-asset ratios.
g) A boom in stock market prices
h) An increase in ATM charges (40 Marks)
Question Two
Md Ms
Given C=400+ 0.5 Y d I =700−4000 i G=200 T =200 =0.5 Y −7500 i =500
P P
a) Derive the IS curve relation and the LM curve relation.
b) Find the equilibrium level of Y, i, C and I.
c) Suppose G increased by 500, find the values of Y, i, C and I.
d) Summarise the effect of the fiscal expansionary policy in question (iii) by stating what
happened to Y, i, C and I.
e) Suppose money supply increases by 500, solve for Y, i, C and I.
f) Summarise the effect of the expansionary monetary policy on Y, i, C and I.
g) Suppose policy makers want to decrease the deficit, while guaranteeing that there will be
no decrease in either the output or investment spending. Is there any policy mix that can
achieve this goal? (20 Marks)

Question Three
Suppose that an economy could be characterized by the following structural equations:
Y =C + I+ G+ X−M C=20+0.8 Y d Y d =Y −T T =10 G=10 I =20
X =15 M =12
a) What is the equilibrium level of income?
b) Compute the balanced budget multiplier and explain its implication.
c) Suppose G were increased by 10 and T were increased by 5, what would be the change in
equilibrium income?
d) Suppose G were raised by 15 and T also raised by 15, will there be any change in
equilibrium income? Explain your answer.
e) Suppose T = 10 + 0.15Y, what would equilibrium income be in this case? What is the
multiplier?
f) Suppose T = 10 + 0.15Y and M =12+0.75 Y what would equilibrium income be in this
case? What is the multiplier? (20 Marks)