Macro89 89.1 Explain briefly how open market purchases of bonds can increase the money supply by a

multiple of the amount purchased. Specify TWO assumptions in your explanation. (10 marks) 89.2 Explain why tax-financed government expenditure is expansionary. (10 marks) 89.3 Consider a simple Keynesian closed economy without tax and government expenditure.

The consumption function (C) is given as: C = $50 million + 0.75 Y

Where Y is the aggregate output. Suppose firms plan to invest $80 million and the full-employment output capacity is $400 million. (a) If planned consumption is realized, what is the amount of unrealized investment? (b) Explain how the introduction of taxes can help the planned investment to be fully

realized. (10 marks)

89.4 (a) Distinguish between the nominal interest rate and the real interest rate. (b) Explain how high growth rates in the money supply can lead to high nominal interest

rates. (10 marks) 89.5 Country A has 50 workers. Each worker can produce 1 unit of X or 3 uni ts of Y. Suppose

the country is small and can exchange 1 unit of X for 1 unit of Y in the international market. The country consumes equal amounts of X and Y. (a) Find the equilibrium output of X and Y. (b) Find the equilibrium consumption of X and Y. (c) Find the amount of imports and exports of X and Y. (10 marks)

89.6. (a) If investment is perfectly interest inelastic, the simple Keynesian model will give the

same prediction about the effect of fiscal policy on national income as the IS-LM analysis. Discuss. (16 marks)

(b) The IS-LM model reduces to the simple Keynesian model if investment is perfectly interest inelastic. Comment. (9 marks)

89.7 (a) A proportional tax system is often praised for its built-in stabilizing effect. However, it

reduces the responsiveness of an economy to discretionary fiscal policies. Explain. (16 marks)

(b) In the light of (a), comment on the following statement : The desirability of employing a proportional tax system depends on the state of the economy. (9 marks)

89.8. (a) Describe briefly the transaction demand and asset demand for money. (9 marks) (b) Even if the government can control the money supply. monetary policy may not be

effective if the demand for money fluctuates. Illustrate with the aid of diagram(s). (16 marks)

89.9. Under the fixed exchange rate system, a country can correct its balance of payments

deficit by either devaluing its currency or implementing a contractionary domestic policy. (a) Explain with appropriate diagrams how the two policies can reduce a balance of

payments deficit. (16 marks) (b) These two policies have different impacts on the economy and, as a result, should be

used under different conditions. Explain. (9 marks)