SECTION [2] PROBLEM SOLVING [60%]
INSTRUCTIONS:
1- ANSWER ALL QUESTIONS.
2- EACH QUESTION IS WORTH SEVEN AND HALF MARKS WITH TOTAL FIFTEEN MARKS
FOR EACH PROBLEM.
Problem 1 (15%)
AE GDP
7520 7400
7680 7600
7840 7800
8000 8000
8160 8200
8320 8400
8480 8600
1) Calculate, MPC and MPS and the multiplier.
2) If the government expenditures increases by 200 what is the new
equilibrium.
Problem 2 (15%)
Year Actual Real GDP Potential GDP Price Level Unemployment
2007 KD 12.4 billion KD 12.4 billion 100 7 %
2008 KD 10.5 billion KD 12.4 billion 96 16%
- Describe country’s macroeconomic condition in these two years in terms of
macroeconomic equilibrium and business cycle. What happened in the
economy in 2008? - If the government purchases multiplier is 3 and the tax multiplier is -1.5,
a) By how much will government purchases need to be changed to
bring the economy to equilibrium at potential GDP?
b) By how much will taxes have to be changed to bring the economy
to equilibrium at potential GDP?
Problem 3 (15%)
The below information shows that economy needs corrective actions by the
Central Bank, which decided to use monetary policy.
Year Actual Real GDP Potential GDP Price Level
2015 KD 15.6 billion KD 15.2 billion 104
Answer the below questions: - If the Central Bank wants to keep real GDP at its potential level, should it
use an expansionary or a contractionary monetary policy? - Explain the mechanism of that policy. (explain how tools need to be
applied)
Problem 4 (15%)
Government plans to apply fiscal policy in 2015.
Year Actual Real GDP Potential GDP Price Level
2014 KD 15.0 billion KD 15.0 billion 100
2015 KD 15.4 billion KD 15.0 billion 105
Answer the below questions: - Which fiscal policy will be applied? Calculate by how much government
should change taxes to reach equilibrium, if tax multiplier is equal to -2 in
this economy. - Will increase in Government purchases be a good decision? Why? Explain
the mechanism.
SECTION [3] SHORT ESSAY [20%]
INSTRUCTIONS:
1- WRITE YOUR ANSWER IN THE SPACE PROVIDED WITH CLEAR ARGUMENTS.
2- USE THE FORMAT WITH INTRODUCTION, BODY TEXT AND CONCLUSION.
3- YOU SHOULD SPEND ABOUT [24] MINUTES ON THIS SECTION
“Unemployment is a major challenge that affects youth across Kenya. Approximately 800,000
young Kenyans enter the labor market every year and youth unemployment is estimated to be
as high as 35%, compared to the overall national unemployment rate of 10%. Furthermore, 80%
of unemployed Kenyans are below 35 years old. (World Bank, 2015)”
Now, if “Kenya” wants to control Unemployment rate, your task is: - Define the phase of the business cycle that Kenya is going through.
- To choose the appropriate monetary and fiscal policies.
- To provide clear arguments using, AD and AS analysis, to show what are the similarities
and difference between the “selected” monetary and fiscal policy? (Use the format with
introduction, body text and conclusion)