GUIDELINES TO ANSWER THE OCT/NOV 2019 EXAMINTION PAPER: Unique
number
SECTION A: COMPULSORY (60 marks: 30 x 2 = 60)
QUESTION 1 (5 marks) (x2 = 10 marks)
a. It is where the change in G is equal to the change in T (∆G = ∆T) and the equal increase in
government spending and taxes will still ...
ECS2602
GUIDELINES TO ANSWER THE OCT/NOV 2019 EXAMINTION PAPER: Unique
number 474911
SECTION A: COMPULSORY (60 marks: 30 x 2 = 60)
QUESTION 1 (5 marks) (x2 = 10 marks)
a. It is where the change in G is equal to the change in T (∆G = ∆T) and the equal increase in
government spending and taxes will still have a stimulatory impact on the level of output and
income
.
b.
DIAGRAM:
Value 200 must correlate with 1000 and
Value 120 must correlate with 600 (check equilibrium point where ZZ intersect 450 line)
BACKGROUND:
Value of the multiplier is = 5.
Assume G↑ with 100 and T↑ with 100.
Given: G = 100 and Y = 500 on the diagram.
, 2
G↑ with 100: increase in income is therefore 5 x 100 = 500 and Y0 = 500 + 500 = 1 000) T↑
with R100: change in autonomous spending is c(T) = 0.8(100) = 80 and Y0 = 80 x 5 = 400.
Then Y0 = 500 + 400 = 900.
The net effect is 100 [calculation: Y0 = 1 000 – (80 x 5) = 1 000 – 400 = 600]
NOTE: Student can also use Y0 = α (c0 + Ī + G – cT)
OR
DIAGRAM: Value 120 must correlate with 600
QUESTION 2 (2 marks) (x2 = 4 marks)
The interest rate and the level of output and income are two important variables that influence the
demand for money.
Use the following demand for money curve to explain the impact of (i) the interest rate and (ii) the
level of output and income on the demand for money.
Clearly indicate on the diagram the shifts and/or movement along the curve(s).
, 3
Correct sequence important and no change of M to Y on the diagram.
(i) The interest rate: ↑ i
Md↓
↑ interest rate (i) causes ↓ in demand for money Md or
↓ interest rate causes ↑ in demand for money Md
(On diagram: movement along the Md curve)
(ii) The level of output and income:
Y↓ Md↓
↑ in income (Y) causes ↑ demand for money Md ↓ in
income (Y) causes ↓ demand for money Md
(On diagram: rightward or leftward shift of the Md curve)
QUESTION 3 (5 marks) (x2 = 10 marks)
a. LM curve shows combinations of interest rates (i) and Y where the financial market is in
equilibrium given that real money supply is fixed. b. Y↓ Md↓ i↓
c. Derive the LM curve by assuming that the level of output and income decreases.
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