Use diagrams where necessary.

Questions

1.

Consider the following equations for a small open economy for both the goods and money markets.

C = 3000 + 0.8Y^d; T = 1000 + 0.3Y; G = 6000; TR = 500; I = 4000 + 0.24Y - 100r; M = 3000 + 0.2Y; X = 2000; L_P = 1000 + 0.15Y; L_T = 2000 + 0.25Y - 15r; Ls = 1000 - 35r; MS = 40,000; P= 4

a. Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate.

b. At this equilibrium level of income and interest, compute the levels of disposal income, total transactions demand for money, investment demand and the value of net exports.

c. Suppose the government raises govt. expenditure by 20% in order to increase aggregate demand. Show how this policy results in the crowding out effect.

2.

a Discuss usingtheIS-LM framework,howpresidentuhuru'staxcutsandcentralbank'sexpansionarymonetarypolicymaysteertheeconomyoutofRecessioncausedbyCovid-19.

Ensuretheyoudrawdiagramsanddiscussthelongruneffectstoo.

bAnswerTrueorFalse,thenjustifyyourresponsewithpractical

economic examples:

i.openmarketoperationsaremoreeffectiveinadevelopingcountrylikeKenyawhencompared withtheBankRatePolicy.

SinceQuantitativecreditcontrolinstrumentsaremore targeted and more objective, it is always advisable that they be applied at all times over the selective instruments