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PRIFYSGOL ABERYSTWYTH UNIVERSITY
DEGREE EXAMINATIONS – May / June 2009 ARHOLIADAU GRADD – Mai / Mehefin 2009 SEMESTER 2
EC30320 MACROECONOMIC BEHAVIOUR AND SYSTEMS
Time Allowed: TWO Hours Answer THREE Questions Choose at least ONE question from EACH SECTION
SECTION A
Question 1.
(a) Derive the IS curve stating any assumptions you made.
(b) Discuss factors that determine the slope of the IS curve.
(c) Suppose the authorities are considering increasing the level of economic activity by either increasing government spending (G) or reducing taxes (T). Using the IS- LM model, explain whether an equal change in G and T would have the same impact on output and the interest rate.
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’.
Question 3.
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.
Question 4.
(a) Describe Minsky’s Financial Instability Hypothesis (FIH).
(b) Using this hypothesis, evaluate how changing macroeconomic conditions can affect the overall fragility of the economy.
(c) Discuss the relevance of Minsky’s FIH to the current global financial crisis.
TURN OVER
SECTION B
Question 5.
(a) Describe three instruments of monetary policy. Explain how the central bank can affect the money supply using these instruments.
(b) Explain the difference between ‘sterilisation’ and ‘non-sterilisation’ of foreign currency reserve flows.
(c) 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 unemployment 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.
Question 6.
Using the IS-LM-BP model, analyse the impact of fiscal expansion on the balance of payments and national income under the following conditions:
(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 monetary authorities did not sterilise reserve flows?
Use appropriate diagrams to support your arguments.
Question 7.
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.
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.
Question 9.
Critically assess fundamental differences between the Keynesian and Monetarist schools of thought with respect to the role of government in managing the economy. (Note: this question is based on the documentary video film “Commanding Heights: Battle of Ideas”.)
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