Short Answer Problem Set #2
Instructions: You are required to answer all questions.
Question 1:
Briefly explain how one or more of the microeconomic components, namely consumption,
investment, supply and demand for money influence macroeconomic outcomes and formulations
of the following macroeconomic theories:
a. Solow Growth Model (5marks)
. The Mundell-Fleming model (6marks)
c. Neoclassical Model of Investment (5marks)
Use mathematical equations and graphs where necessary.
Question 2:
a. Discuss and graphically depict Keynes’s three conjectures about the consumption function.
(6 marks)
. Present and explain Keynesian’s consumption function that was created from these
conjectures. (2 marks)
c. What is meant by "autonomous consumption"? (2marks)
d. Explain the consumption puzzle? (3marks)
e. How does the Life-Cycle Hypothesis resolve the puzzle? (4marks)
Question 3:
a. Discuss the assumptions of the Fisher’s Intertemporal Choice Model (4marks)
. Using Fisher's Intertemporal Choice model, consider the following scenario:
i. Suppose Milo earns $1,750 in the first period and $2,500 in the second period. If
he consumes $1,200 in the first period and $1,550 in the second period, what is the
interest rate? (2 marks)
ii. Now if Milo’s consumption changes to $1,800 in the first period and $2,000 in the
second period, what is the new interest rate? (2 marks)
c. Graphically depict and explain the Consumer’s optimum in the Fisher’s Intertemporal
Choice Model. (6 marks)
Question 4:
a. Using the Neoclassical model of Investment, mathematical equations and graphs, explain
the real cost to rental firms of owning capital. (5marks)
. Account for what motivates rental firm’s investment decisions? (3marks)
c. With the use of the neoclassical model of investment, explain what would happen to the
ental price of capital, the cost of capital, and investment if a hu
icane destroys some
portion of the capital stock. (3marks)
Question 5:
a. The central bank of a country directly influences the components of money supply through
100-percent-reserve-banking or fractional reserve banking. By distinguishing between
these two methods, explain how the central bank directly influences the components of
money supply. (6marks)
. The following equation is used to model money supply under fractional-reserve banking:
i) Identify the variables within the equation (2marks)
ii) Explain how the exogenous variables within the equation influence money supply
and cause it to change. (6 marks)
iii) Suppose the banks in an economy have a reserve-deposit ratio of 12 percent and
the cu
ency-deposit ratio is 25 percent. Also, the Central Bank increases the
monetary base by $400 through open market operations, how would the money
supply change? (3 marks)
c. If the central bank desired to increase spending in the economy, using the instruments of
monetary policy, explain how the central bank can indirectly achieve this. (9marks)
d. Explain the difference between portfolio and transactions theories of money demand.
(6marks)
Ru
ic for assessing Problem Set #2
Assessment will be graded out of 15% with conversions of total score /90 to award of marks as
follows:
Criteria Excellent (80
– 100)
Good
(60 – 79)
Acceptable (30
– 59)
Unacceptable to
poor quality (0
– 29)
Understanding
of question
equirements
(54)
Demonstrated
a very good
understanding
of what the
questions are
asking and
equire.
Answers were
logically
presented.
Demonstrated
a good
understanding
of what the
questions are
asking and
equire.
Answers were
attempted
logically but
final answer
inco
ect with
espect to
some parts of
the question.
Demonstrated a
fair understanding
of what the
questions are
asking and require.
Some answers were
attempted
logically but final
answers were
mostly co
ect.
Demonstrated a
poor
understanding of
what the questions
are asking and
equire.
Final answers
largely inco
ect
and incoherent
logic presented or
the question was
not attempted at
all.
Clarity of
argument (18)
Excellent
expression and
argument in
terms of
explaining
answers and/or
giving reasons
for answers.
Good
articulation
and argument
given and/or
giving reasons
for answers.
Fair articulation
and argument in
terms of
explaining answers
and/or giving
easons for
answers.
Argument is
unclear.
0 points where no
explanations are
provided.
Graphs
and
equations
provided where
appropriate
(18)
Provided
appropriate
graph which
included title,
co
ect axes,
and co
ect
curves.
Provided
appropriate
graph which
missed one of
the following
elements: title,
co
ect axes,
and co
ect
curves.
Inappropriate graph
provided.
0 points if no graph
is provided at all.
• Score Breakdown:
• The maximum points you will be awarded for this assessment item total 90 points.
• However, note that your final grade will be out of 15%.
• You will see this final grade listed against your name on the course page. For example, if
you are awarded 70/100 points your final grade for this assessment item will be 11.7%
(70/90 * 15)