QUESTION 1 (25 MARKS)

a.Give an hypothetical numerical example to show the relationship between the marginal propensity to consume (MPC) and the multiplier (m)?How do you conclude the relationship between these two? (10 marks)

b.Considering both the Keynesian and the aggregate demand-supply frameworks, if households as a group experience an increase in wealth at a given price level,what happen to total expenditure (TE), aggregate demand (AD) and Real GDP. Illustrate and explain the changes using a suitable graph. (15 marks)

QUESTION 2 (15 MARKS)

A pandemic of Covid-19 has significantly effect the economy around the world and the suitable policy to be implemented is expansionary fiscal policy. Suppose the government is focusing more on tax component instead of the other components, explain in details how taxcan impact both aggregate demand and aggregate supply in this situation. Give an example of each.

QUESTION 3 (15 MARKS)

When a customer takes cash from a drawer in his home and deposits it into his checking account, the composition of the money supply will change immediately and the size of the money supply may eventually change. Explain the step-by-step process by which this action may change the money supply in economy.

QUESTION 4 (15 MARKS)

Suppose the economy is experiencing an inflationary gap. Based on available data, the government starts implementing contractionary monetary policy, but this moves the economy into a recessionary gap. Discuss.