QUESTION 1

a) Define fiat money, commodity money, gold standard and seigniorage

b) Demonstrate fully your understanding of the following, using equations where necessary:

i) The Quantity theory of Money

ii) The Fisher effect

c) Explain fully the costs of expected and unexpected inflation

d) Explain fully how the Bank of Zambia controls the supply of money

QUESTION 2

Below is an IS-LM Model:

C = 250 + 0.20Yd

I = 150 + 0.20Y - 1000r

G = 250

T = 250

(M / P) d = 2Y - 8000r

(M / P) s = 1600

a) Derive the IS and LM relations

b) Find the equilibrium level of income (Y) and interest rate (r).

c) Find the values of Consumption and Investment in equilibrium.

d) Suppose there is an expansionary monetary policy and money supply( (M / P)s increases

to 1840. Find the effect of this on equilibrium levels of income (Y), interest rate (r),consumption and investment.

QUESTION 3

Consider the economy of Hicksonia with an adult population of 250 million. The number of

employed workers (E) is 140 million, and the number of unemployed workers (U) is 10 million.

a) What is the unemployment rate and the labor force participation rate? Interpret your

answers.

b) The job finding rate (f) is 0.19 and the rate of job separation (s) is 0.01. What is the

natural rate of unemployment? Is the current unemployment rate higher or lower than the

natural rate?

c) Congress is concerned that the natural unemployment rate is too high. Name two policy

options to lower the rate and explain why they would be effective.

d) What is wage rigidity? Explain three causes of wage rigidity.

e) With the aid of a diagram, explain structural unemployment in the context of wage

rigidity and job rationing.

f) List and explain four efficiency wage theories.

QUESTION 4

Consider a Cobb-Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college

degrees among the workers).The production function is:

Y K1/3L

1/3H1/3

a) Derive an expression for the marginal product of labor. How does an increase in the

amount of human capital affect the marginal product of labor?

b) Derive an expression for the marginal product of human capital. How does an increase in

the amount of human capital affect the marginal product of human capital?

c) What is the income share paid to labor? What is the income share paid to human capital?

In the national income accounts of this economy, what share of total income do you think

workers would appear to receive?

d) An unskilled worker earns the marginal product of labor, whereas a skilled worker earns

the marginal product of labor plus the marginal product of human capital. Using your

answers to (a) and (b), find the ratio of the skilled wage to the unskilled wage. How does

an increase in the amount of human capital affect this ratio? Explain.