Final Examinations

Semester: Spring 2021

Course: Principles of Macroeconomics

Code:ECO 1020B

EXAMINATION INSTRUCTIONS

INSTRUCTIONS:

Answer all questions.

DATE:Monday 12^th, APRIL 2021

QUESTION ONE

a)Using a sketch, show and briefly discuss how changes in interest rates influence money markets?(5 marks)

b)Briefly discuss the Irving Fisher's Quantity Theory of Money.(4 marks)

c)Discuss the costs of voluntary and involuntary unemployment to the exchequer.

( 3 marks)

d) What does the concept economic growth mean? How is it different

from economic development?(5 marks)

e) Briefly discuss the arguments for and against economic growth( 6 marks)

f)Inflation can either be anticipated and unanticipated. Explain the redistribution effects of unanticipated inflation.(2 marks)

QUESTION TWO

a)What is monetary policy?And what are its key tools?( 4 marks)

b)State and explain the monetary approaches that can be used by central bank of Kenya to reduce inflation.(6 marks)

c)What does the term deposit multiplier mean?( 3 marks)

d)Suppose you have been told that Kenya Commercial Bank (KCB's) required reserve ratio (RRR) is 10 %, and that 100,000 million have been deposited:

i.Find out how much should be in KCB's reserve?( 2marks)

ii.Determine how much can KCB safely loan?(2 marks)

iii.Compute the deposit multiplier for KCB.(2 marks)

iv.Estimate how much money would be created by the banking system by the end of the business cycle?( 2 marks)

e)State and briefly discuss the objectives of international trade policy. (4 marks)

QUESTION THREE

a)What is inflation? And how is it related to unemployment.(5 marks)

b)With the help of diagrams explain how demand pull inflation is different from cost-push inflation(2 marks)

c)State and briefly explain any three functions of money.(6 marks)

d)How is money supply controlled in an economy?(4 marks)

e) Suppose the desired full employment equilibrium for a hypothetical country is 40

trillions but the economy is currently in the equilibrium at 20trillion and the

requiredreserve ratio is 0.5, what must the central bank (CB) of this country do?

Will the CBcarry out similar or different policy objective if the equilibrium

changed to60 trillion? Explain your answer.(8 marks)

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