Reference no: EM13170646

1. If you woke up in the working & found that nominal GDP has doubled overnight, what statistic would you need to check before you began to celebrate: Why?

b) Why do the economists use real GDP rather than nominal GDP to gauge economic well-being?

c) Discuss critically GDP as a measure of economic welfare.

2. How each of the following events is likely to affect GDP?

a) Environmental laws prohibit the firms from emitting pollution

b) Strikes by trade unions.

c) Discovery of new seed increases farm harvest.

3. Siankanga, a farmer grows a bushel of wheat & sells it to a miller for K 1.00. The miller turns the wheat into flour & then sells the flour to a baker for K 3.00. The baker uses the flour to make bread & sells the bread to households for K 6.00. The households eat the bread. What is the value added in each stages of production? What is GDP?

4. Construct a model of loanable funds market in a closed economy.

a) Discuss the effect of an increase in the Government Budget Deficit on the rate of interest & the level of private investment. Identify the crowding out effect in this context.

b) Suppose that investment is perfectly interest inelastic. Discuss the crowding out effect for an increase in the govt. budget deficit.

c) If saving is perfectly inelastic then what will be the crowding out effect for an increase in the govt. budget deficit.

5. Define velocity of money. Discuss the role of velocity of money in the quantity theory of money.

b) "ATM card increases the velocity of money" True or false. Justify.

6. Discuss the process of credit creation by the commercial banks. Explain in this context the statement that "an individual bank has little ability to expand the money supply unless all the other banks expand in step"

7. The total value of loan in an economy is K400 million and the reserve ratio is 20 per cent. An increase of K15 million in the money which the public keeps in commercial banks together with an increase of the reserve ratio to 25 per cent will increase the total amount of loans by K50 million. True or false? Explain.

8. Using Simple Keynesian Model, discuss the effect of the following:

a) An increase in govt. expenditure.

b) A decrease in lump sum taxes.

In this context compare the govt. expenditure multiplier with tax multiplier.

9. Suppose that the economy is characterized by the following structural equations:

C = 160 + 0.6 (4 -T)
I =150; G = 150; T = 100.

a) Determine the equilibrium output level.

b) If G rises to 200, what is the how equilibrium level of output? What is the value of the govt. expenditure multiplier?

c) If tax falls to 50, by how much will equilibrium output rise? What is the value of tax multiplier?

10. In mainstream economics, it is argued that firms invest more when interest rates fall because it lowers their cost of financing. Keynes, however, argues something a little different. He says, "A fall in the rate of interest stimulates the production of capital goods not because it decreases their costs of production but because it increases their demand price." How is this so?