UNIVERSITY EXAMINATIONS: 2021
EXAMINATIONS FOR A BACHELOR’S DEGREE
ECO 1302: INTRODUCTION TO MACROECONOMICS
(DAY EXAM)
DATE: AUGUST, 2021 XXXXXXXXXXTIME: 3 HOURS
INSTRUCTIONS: Attempt ALL Questions
Question ONE (20 Marks)
1. Consider a closed economy that is characterized by the following equations:
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Where is the , C is private consumption expenditure, I is the Investment expenditure, G is government expenditure, T is tax revenues, is money supply, is transaction demand for money, is the speculative demand for money and is the interest rate (in % points).
a) Derive ) the demand for real money balances equation (where is the aggregate price level.) XXXXXXXXXX1 Mark)
) Derive the IS and LM equations of the economy (Express as a function of and assume is fixed at 1.0.) XXXXXXXXXX4 Marks)
c) Calculate the short–run equili
ium values of and in the economy XXXXXXXXXXMarks)
2. (a). In today’s economy, it’s harder for workers to get promoted. In 2006, it took an average of 2 ½ years to get a promotion; today it takes 4 ½ years. As a result, fewer workers are willing to boost their productivity in an effort to impress the boss and get the promotion. In 2006, 25 percent of employees said they were willing to give “an extra oomph” at work (boost their productivity); today about 15 percent are willing to do so.
Explain the connection to the Phillips curve. XXXXXXXXXX6 Marks)
(b). When an employer lists a job opening, they receive hundreds of applications. Eightfold is a new product that uses artificial intelligence (AI) to scan resumes and quickly and accurately identify the applicants who are the best fit for the job. An economist who studied the use of AI in hiring said, “You get the more nontraditional, equally qualified, equally high-performing people, but the employer doesn’t seem to have to compete for them as much.”
What effect might the use of AI have on the slope of the Phillips curve and why?(6 Marks)
Question TWO (10 Marks)
1. Consider the Kenyan economy with a Kenya Shilling (KSH) as the domestic cu
ency. Using well–labelled diagrams, of demand and supply of foreign cu
ency, describe the effect of following events on the KSH and Balance of Payment of the Kenya’s economy. (Use a different diagram for each event)
a) Increase of income tax rate from 25% to 30% which causes the average income to raise in Kenya relative to average income in Rwanda, ceteris paribus XXXXXXXXXX3 Marks)
) Due to COVID–19 pandemic, Kenyans expect a low exchange rate against the US dollar, ceteris paribus.