(a) For the following stage game, check whether the strategy profile given (below) is a subgame- perfect equilibrium of the game in which the stage game is repeated infinitely many times. The discount rate is 6 = 0.9. Stage Game: Player 2 M R T (3,1) (0,0 (-1,2 Player 1 M (0,0) (0,0) (0,0) B (-1,2) (0,0) (-1,2) Strategy profile: Until some player deviates, player 1 plays T and player 2 plays L. If anyone deviates, then each plays M thereafter. (b) Consider the following stage game: Player 2 C D (1,1) (-1,3) Player 1 C D (2,-1) (0,0) Suppose that this game is played infinitely many times with discount factor 6. Consider the following strategies: Play C if all previous outcomes have been (C, C), otherwise, play D forever. For what values of o are these strategies a Nash equilibrium?b) Suppose that in the recent news you have heard that an economy is at 'full employment'. Explain if this economy has got an unemployment rate at zero percent? (2 Marks) 3. Consider the following consumption function: C = 700 + 0.2Y where C is aggregate Consumption and Y is the aggregate income. a) Explain how you would interpret the coefficients '700' and '0.2'. (2 Marks) b) State any three assumptions of a Keynesian model. (3 Marks) 4. "The term deficit financing has been described as the financing of a deliberately created gap between public revenue and public expenditure, the method of finance being borrowing of a type that results in a net addition to national outlay or aggregate expenditure". a) State the two main ways in which a government can obtain the needed funds in periods of mismatch between public expenditure and revenue. (2 Marks) b) Explain the effect of an increase in income taxes on the level of disposable income, aggregate demand (AD) and government's tax revenue, (3 Marks) 5. "Banks always keep a certain proportion of their total assets in the form of cash, partly to meet the statutory reserve requirement and partly to meet their own day-to-day needs for making cash payments", a) Differentiate between the monetary base and the reserve ratio. (2 Marks) by Explain the term *bank panic'. (2 Marks) c) Explain one reason why do banks have reserve requirement. (1 Mark) 6. "A macroeconomic model is a very useful in the study of macroeconomics and the general behavior of the economy". a) Explain what you understand by the term "macroeconomic model". (1 Mark) b) State two ways in which a macroeconomic model could be described. (2 Marks) c) *A business cycle is an economic model". Explain the relationship that this model depicts, (2 Mark) ECN501Sem Semester 2. 2019 Page 5 of 8QUESTION ONE One of the economic impacts of the current covid -19 pandemic is a rise in demand deficient unemployment. i) Explain how fiscal policy can be used to solve this problem. (5 marks) i) How can monetary policy be used to address the same problem. (5 marks) iii) Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand and real GDP. Illustrate with a graph where appropriate (5 marks) iv) Discuss the negative redistributive effects of unanticipated inflation on any three groups/agents in the economy. (5 marks) v) Which of the two types of inflation is most likely to be associated with a negative GDP gap? Illustrate with a graph. (5 marks) vi) During World War II, an Allied soldier named Robert Radford spent several years in a large German prisoner-of-war (POW) camp. At times more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described how an economy developed in the camp, in which prisoners traded food, clothing, and other items. Services such as barbering also were exchanged. Lacking paper money, the prisoners began to use cigarettes (provided monthly by the Red Cross) as money. Prices were quoted, and payments made, using cigarettes. (a) In Radford's POW camp, explain how cigarettes fulfilled the three main functions of money (3 marks) (b) Briefly discuss why a non-smoking prisoner would have been willing to accept cigarettes in exchange for a good or service in Radford's camp. (2 marks)