INSTRUCTIONS

ANSWER ALL QUESTIONS:

For each of the following questions, select the most correct answer and give your

explanation for each.

1. In general, an economy is improving when:

A) GDP growth has increased, unemployment has increased and inflation has increased

B) GDP growth has increased, unemployment has decreased and inflation has increased

C) GDP growth has increased, unemployment has decreased and inflation has decreased

D) GDP growth has increased, unemployment has increased and inflation has decreased

2. If we were interested in the economic welfare of a country's citizens, we would look at:

A) Nominal GDP

B) Nominal GDP per capita

C) Real GDP

D) Real GDP per capita

3. If a country is experiencing an economic downturn and GDP has fallen in two or more

successive quarters, we say this country is:

A) In a depression

B) In a recession

C) Experiencing positive growth

D) Experiencing no growth

4. Stagflation is when:

A) There is high unemployment and high inflation

B) There is low unemployment and high inflation

C) There is high unemployment and low inflation

D) There is low unemployment and low inflation

5. The Classical Theory of Full Employment says that:

A) At a higher wage rate more workers will be employed

B) At a lower wage rate more workers will be employed

C) The higher the wage rate, the greater the demand for labour

D) The wage rate does not impact employment

6.An increase in the aggregate price level, P, will most likely have which of the following

effects?

A). a rightward shift in the IS curve.

B). a leftward shift in the IS curve.

C). an upward shift in the LM curve.

D). a downward shift in the LM curve.

7. According to the Keynesian Model:

A) The labour market is perfect due to the existence of trade unions and government

B) The labour market experiences complete flexibility of wages

C) The labour market is imperfect due to the existence of trade unions and government

D) The labour market is not impacted by the existence of trade unions and government

8. According to the Keynesian Model:

A) Savings is a function of national consumption

B) Savings is a function of national income

C) Savings is a function of the national interest rate

D) Savings is an autonomous function

9. Complete the following statement: The greater the injections in the economy:

A). The greater the multiplier effect

B). The lesser the multiplier effect

C). The multiplier effect will equal the leakages

D). No effect on the multiplier

10. The Withdrawals = Injections equality requires that:

A). Savings equals investment

B). Imports equals exports

C). Taxes equals government spending

D). The sum of savings, taxes and imports equals the sum of investment, government spending

and exports

QUESTION 11

Which is more important: controlling inflation or controlling unemployment?(10 marks)

QUESTION 12

Assume that the economy is open and with government. Investment, government spending,

exports and imports are autonomous. Tax is only lump-sum. The price level and interest rate are

held constant. The following variables relate to the economy:

Table 1: Open economy with government Variable Value (Ksh $ billions)

VARIABLE

VALUE (KSH $ BILLIONS)

Investment

100

Government spending

300

Lump-sum tax

100

Autonomous consumption

400

Marginal propensity to consume

0.5

Exports

250

Imports

150

a)Calculate the equilibrium level of national income (Y) using the aggregate demand = national

income method. Show all workings and round your answer to the closest whole number.

(5 marks)

b)Calculate the equilibrium level of national income (Y) using the injections = withdrawals

(leakages) method. Show all workings and round your answer to the closest whole number.

(5 marks)

c)Reflect the equilibrium national income on an AD -AS short-run graph. Fully label your

graph, and show the equilibrium national income point.(5 marks)

d)What is the multiplier in this economy?(5 marks)