Question 1 [Total 25 marks)

(a) Define the concept of natural monopoly. [9 marks]

(b) Demonstrate that if a natural monopoly is to operate at the efficient output level by adopting marginal cost pricing, it will need a subsidy to stay in production. (8)

(c)Discuss two justifications for creating monopolies. (8)

Question 2 [Total 25 marks]

(a)With the aid of properly labelled diagrams discuss the short-run effects of an oil price increase on real output and the price level.[9 marks]

(b)With the aid of a diagram analyse the short-run effects of the oil price increase on the short- run Phillips curve.(5 marks]

(c)Suppose that the Bank of Namibia responds to the oil price increase by increasing the money supply. Explain the consequences of such a move on the price level, real output and the level of aggregate demand in the short run.[5 marks]

(d)Suppose that as an alternative to using monetary policy in response to the oil price increase the government reduces business taxes, which results in lower production costs. Discuss the effects on the price level and real output.[6 marks]

Question 3 [Total 25 marks]

National savings in Namibia has recently increased.

(a) Explain the effect of this increase on the real interest rate in Namibia.

(6 marks]

(b)The real interests in most parts of the world have largely remained constant. Discuss the effect of the real interest rate change in the Namibian that you identified in part (a) on the value of the Namibian dollar in the foreign exchange market.(9 marks]

(c)Given your answer in part (b), explain the changes that will occur in imports from other countries and exports from Namibia.[IO marks]

Question 4[Total 25 marks]

In order to raise funds to finance the budget deficit the Bank of Namibia intended to conduct an open-market sale of government bonds.

(a)Explain , with the aid of an appropriately labelled diagram of the money market , how the open-market sale of bonds will affect money supply and the interest rate .[8 marks]

(b)Discuss the short run effects of open-market operation on real output and the price level. (6 marks]

(c)Discuss the short run effects of open-market operation on the unemployment rate and the inflation rate.(6 marks]

(d)Identify a fiscal policy action that would offset the impact on real output and price level that you identified in (c) .[5 marks]

Question 5[Total 25 marks]

(a)Give two examples of public goods and explain how their competitive prices are determined. (10 marks]

(b)Explain why markets undersupply public goods.[15 marks]