Question 1. ( I ) Identify and briefly explain the chief characteristics of the concern rhythm.

( 2 Markss ) Business rhythms are normally characterized by periods of passage from extremum to trough and so from trough to top out. The extremum of a concern rhythm is the high point of GDP prior to a downswing whereas a Trough is the low point economic activity prior to a recovery. The period in which the economic system is traveling from a extremum to a trough is called a contraction and the period in which the economic system is traveling from a trough to top out is an Expansion.( two ) Explain the constructs of ( a ) possible end product and ( B ) the end product spread.

( 3 Markss ) Potential Output ( y* ) or full employment end product is the degree of GDP an economic system can bring forth when utilizing its resources. such as labor and capital. at normal rates. This is non the same as maximal end product.

Potential end product grows over clip with growing in labor and capital and with growings in engineering. At any point in clip. the difference between the economy’s possible end product and existent end product is called the end product spread ( y – y* ) . A positive end product spread. which occurs when existent end product is higher than possible end product and when resources are being utilised at above-normal rates.

is called an expansionary spread. This is related to houses runing above normal capacity and can take them to raise monetary values ( inflationary ) . On the other manus. a negative end product spread.

which occurs when possible end product exceeds existent end product and when resources are non being utilised. is called a contractionary spread. This is related to capital and labour non being to the full utilised ( cost in footings of forgone end product ) .( three ) Explain the construct of Okun’s jurisprudence. Discourse the deductions of Okun jurisprudence for policymakers.

( 5 Markss ) Okun’s jurisprudence provinces that each excess per centum point of cyclical unemployment is associated with about a 1. 6 per centum point ( for Australia ) addition in the end product spread. measured in relation to possible end product. The quantitative relationship is ( y-y* ) /y* = -B ( u-u* ) .

This describes how an extra per centum point of cyclical unemployment is associated with a B per centum point diminution in the end product spread. The end product losingss associated sustained in recessions. calculated harmonizing to Okun’s jurisprudence. can be rather important. Calculations utilizing this relationship depict that end product spreads and cyclical unemployment may hold major costs. Therefore.

we can reason with the fact that the populace and policymakers have concern in relation to contractions and recessions.Question 2 ( I ) Discuss the function played by fixed ( or sticky ) monetary values in the Keynesian theoretical account of income finding. Briefly explain what would go on if monetary values were to the full flexible in the short tally. ( 2 Markss ) New Keynesians assume monetary values and rewards are fixed or gluey. intending that they do non alter easy or rapidly with changes in supply and demand.

so that measure accommodation prevails. When monetary values are gluey. higher aggregative demand raises production. and this raises incomes.

If monetary values were to the full flexible in the short tally. economy’s resources would be to the full employed and thereby the economic system would return to the natural degree of existent GDP. Firms would halt bring forthing when monetary value is lower than production cost. so there would be less competition.( two ) Explain the construct of Planned Aggregate Expenditure ( PAE ) . How does PAE differ from Actual Outgo? ( 2 Markss ) Planned Aggregate Expenditure is the entire planned disbursement on concluding goods and services.

In equilibrium. planned outgo and existent outgo must be in the economic system. The difference between planned and existent outgo is unplanned stock list investing. When houses sell fewer merchandises than planned. stocks of stock lists addition. Because of this.

existent outgo can be above or below planned outgo.( three ) Use the Keynesian sum outgo theoretical account and appropriate diagrams to explicate the followers: – The paradox of thrift – The consequence on equilibrium GDP of an exogenic addition in exports. ( 6 Markss )Question 3 ( I ) Explain what is meant by the multiplier? Why. in general. does a one dollar alteration in exogenic outgo produce a larger alteration in short-term end product? ( 3 Markss ) The income-expenditure multiplier. or the multiplier for short.

is the consequence of a one-unit addition in exogenic outgo on short-term equilibrium end product. For illustration. a multiplier of 3 agencies that a 6-unit lessening in exogenic outgo reduces short-term equilibrium end product by 18 units. Therefore.

a one dollar alteration in exogenic outgo produce a larger alteration in short-term end product as initial sum of outgo leads to raised ingestion disbursement ensuing in an addition in national income greater than the initial sum of disbursement.( two ) Explain the function played by the fringy leaning to import in finding the size of the multiplier. Other things equal. how does an addition in the fringy leaning to import impact the size of the multiplier? ( 3 Markss ) The fringy leaning to import is the alteration in imports divided by the alteration in disposable income. It decides the incline of the sum expenditures line and is portion to the multiplier procedure. Similar to revenue enhancements.

the fringy leaning to import tends to take down the size of the multiplier as demand for domestically produced concluding goods and services falls. An addition in the fringy leaning to import additions the value of the denominator of the equation. which so decreases the overall value of the fraction and therefore the size of the multiplier.( three ) Use a diagram to exemplify the construct of short-term equilibrium in the Keynesian sum outgo theoretical account. Suppose the economic system is ab initio non in equilibrium.

explicate the procedure by which the economic system adjusts to equilibrium. ( 4 Markss )Question 4 ( I ) What are the chief instruments of financial policy? Explain how each might be used to shut an expansionary end product spread. ( 4 Markss ) Main constituents of Fiscal Policy: – Government outgo: Government disbursement of goods and services. investing and substructure straight affects entire disbursement.

If excessively much or excessively small entire disbursement causes end product spreads. the authorities can assist to steer the economic system toward full employment by altering its ain degree of disbursement. – Taxes or reassign payments: In contrast. alterations in revenue enhancement or transportations do non impact planned disbursement straight.

When disposable income rises families should pass more. Thus revenue enhancement cut or increase in transportations should increase planned aggregative outgo. Similarly. an addition in revenue enhancements or a cut in transportations. by take downing households’ disposable income. will be given to take down planned disbursement.

This stimulates disbursement and eliminates contractionary spread.( two ) Explain what is meant by the authorities budget restraint. Indicate how it provides a nexus between financial policy and public debt. ( 3 Markss ) Government budget restraint is the term given to the construct that authorities disbursement in any period had to be fiscal either by raising revenue enhancements or by authorities adoption.

We can denote authorities outgo undertaken by the authorities in period T by Gt and reassign payments by Qt. Therefore. the entire disbursement activities of the authorities can be noted as Gt+ Qt. Besides. the authorities has three agencies at its disposal to finance this outgo: 1. Taxs available to be spent by authorities it clip t – denoted by Tt.

2. Issued security when authorities borrows money – This is a fiscal plus that obliges the authorities to refund the loan. and pay involvement. over some designated clip period. Bt-2 is the stock of securities that the authorities still has owing at the terminal of the last period.

Any new adoption that the authorities undertakes in period T will be denoted as Bt – Bt-1. The reserve of debt that accumulates when authorities continues borrowing money is called the public debt. 3. Interest needed to pay on government’s stock of debt – in any clip t the authorities pays involvement of rBt-1 where R is the existent rate of involvement. Government expenditures ( purchases.

transportation payments and involvement payments ) in any period demand to be funded by revenue enhancements or by borrowing. This is the Government budget restraint summarized as below: Gt+ Qt + rBt-1 = Tt + ( Bt – Bt-1 ) .If we rearrange this so that gross revenue enhancements are on the left-hand side. the nexus between financial policy and the stock of public debt becomes readily evident: Gt+ Qt – Tt + rBt-1 = ( Bt – Bt-1 ) .( three ) Explain the difference between discretional financial policy and automatic stabilizers.

Which one of these will be the chief influence on the size of the structural budget shortage? Explain. ( 3 Markss ) Discretionary financial policy refers to consider alterations in the degree of authorities disbursement. reassign payments or in revenue enhancement rates. Automatic stabilizers refer to the inclination for a system of revenue enhancements and transportations. which are related to the degree of income to automatically cut down the size of GDP fluctuations.