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ARHOLIADAU EXAMINATIONS
Mai / Mehefin 2012 May / June 2012
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 IS curve stating any assumptions you made. Explain clearly the factors that determine the slope of the IS curve.
b) Using the IS-LM model, explain the concept of ‘crowding out’ in detail. What factors determine the extent of a ‘crowding out’?
c) Explain what you understand by a ‘policy mix’ in the context of the IS-LM framework. Using appropriate diagrams, show how you can achieve stability (i) in the rate of interest, and (ii) in the level of income if the central bank is pursuing a tight monetary policy.
Question 2
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 3
a) Distinguish between the monetary base and the money supply and derive the money multiplier. Clearly state any assumptions you make.
b) Critically appraise Minsky’s financial instability hypothesis. Using this model, evaluate how changing macroeconomic conditions can affect the overall fragility of the economy.
Question 4
Explain why a discretionary policy is not ‘time-consistent’. Discuss how having an independent central bank can produce a more ‘time-consistent’ policy.
SECTION B
Question 5
a) Using the NS-I/X-M model, explain the effect of currency devaluation on the trade balance and the national income. Using appropriate diagrams, explain the ‘crowding out’ effect of devaluation in this model.
b) Explain the logic behind the Swan diagram, and discuss its relevance to the ‘assignment problem’. Suppose a country, which maintains a fixed exchange rate, suffers from high unemployment and trade deficit. Using the Swan diagram, explain what combination of policies would be advisable to achieve objectives of full employment and balanced trade simultaneously.
Question 6
a) Distinguish between three monetary policy instruments. Explain how the central bank can affect the money supply using these instruments.
b) Assume that a central bank, which is facing strong capital inflows, decides not to sterilise reserve flows. Explain (i) what would happen to the value of its domestic currency, and (ii) how it could contain excessive growth of the money supply under this scenario.
TURN OVER
