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ARHOLIADAU EXAMINATIONS
Mai / Mehefin 2011 May / June 2011
EC30320 MACROECONOMIC BEHAVIOUR AND SYSTEMS
Time allowed: TWO hours.
Answer THREE questions.
All questions, and their corresponding parts when appropriate, carry equal marks.
Choose at least ONE question from EACH SECTION.
SECTION A
Question 1
a) Derive the LM schedule stating any assumptions you make.
b) Explain what determines the slope of the IS curve.
c) Suppose the authorities are considering reducing unemployment by either increasing government spending (G) or reducing taxes (T). Explain whether equal change in G and T would have the same impact on output and unemployment.
Question 2
a) Using the IS-LM model explain, in detail, the concept of ‘crowding out’. Discuss the factors that determine the extent of crowding out.
b) Explain what the supply of money is made of and derive the money multiplier. Clearly state any assumptions you make.
c) Explain the difference between ‘sterilisation’ and ‘non-sterilisation’ of foreign currency reserve flows.
Question 3
Describe the ‘Kuznets puzzle’ and discuss its relevance to the Keynesian consumption function. Assess how Modigliani’s Life Cycle Hypothesis can explain the ‘Kuznets puzzle’.
Turn Over
Question 4
Critically assess the main differences between a rule and discretionary based policy. Explain why a rule based policy is more time consistent than a discretionary policy.
SECTION B
Question 5
Critically analyse the fundamental factors that contributed to the recent global financial crisis. Discuss the relevance of Minsky’s Financial Instability Hypothesis to the crisis.
Question 6
a) Explain the logic behind the Swan diagram and discuss its relevance to the ‘assignment problem’. Suppose a country, which maintains a fixed exchange rate regime, suffers from an excess demand and a trade balance deficit. Using the Swan diagram, explain what combination of policies would be advisable to achieve objectives of full employment and balanced trade simultaneously.
b) Analyse the impact of devaluation on the balance of payments and domestic price level under the monetarist model (flexible prices). Explain what is meant by the ‘real balance effect’ of devaluation. Use appropriate diagrams to support your arguments.
Question 7
Using the IS/LM/BP model, analyse the impact of monetary expansion on the balance of payments and national income under the following conditions. Use appropriate diagrams to support your arguments.
a) Zero capital mobility and fixed exchange rates b) Low capital mobility and fixed exchange rates c) High capital mobility and fixed exchange rates d) What would happen in a), b) and c) if the monetary authorities did not sterilise reserve flows?
Question 8
Using the Solow growth model, assess the impact of (i) a rise in the savings rate, (ii) a rise in the population growth rate, and (iii) technological progress on the rate of output growth. Explain what is meant by ‘the golden-rule level of capital’ in this model.
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