KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2012/2013 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF SCIENCE IN ECONOMICS
AND MATHEMATICS
ECON 321: ADVANCED MACROECONOMICS
DAY: FRIDAY DATE: 12/04/2013
TIME: 2.00 – 4.00 P.M. STREAM: Y3S2
INSTRUCTIONS:
Answer question ONE and ANY other TWO questions
QUESTION ONE
(a) Consider an unemployed worker who offers to work for a firm for slightly less than the
firm is currently paying, and who is otherwise identical to firm’s current workers.
(i) Describe at least four possible responses the firm can make to this offer. (4 mks)
(ii) Explain the potential reasons for efficiency wages according to efficiency wage
model. (4 mks)
(b) Suppose
and
Where
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Required
(i) State the assumptions of efficiency wage model. (6 mks)
(ii) Show that at the equilibrium point the elasticity of effort to wages is equal to one.
(3 mks)
(iii) Determine the equilibrium effort. (5 mks)
(iv) Explain the implications of the above model. (4 mks)
c) Explain why the analysis of time inconsistency in monetary policy is important (4mks)
QUESTION TWO
(a) Discuss the structural view on the sources of inflation. (5 mks)
(b) Suppose an economy is characterized by the following:
)- (objective function of the central bank)
) + (Aggregate supply function)
Π= (central bank policy instrument)
Required
(i) Find the optimal policy of inflation and output (5 mks)
(ii) Derive the unconditional expected utility of the monetary authority. (5 mks)
(c) (i)Distinguish between Rule- Based and Discretion-Based monetary policy (2 mks)
(ii) Which of the two rules is superior and why? (3 mks)
QUESTION THREE
(a) with the help of a diagram, explain how expansionary fiscal policy abroad can
influence the real exchange rate. (8 mks)
(b) Use the open economy model to contrast the predicted implications for
the exchange rate in a country with a floating exchange rate and international capital
flows of an expansionary fiscal policy (derive your answer graphically). (8 mks)
c) Distinguish between Flexible targeting Rules and Strict targeting Rules (4 mks)
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QUESTION FOUR
(a) Distinguish the following versions of the convergence hypothesis as explained
by agenor (2004 )
(i) Absolute convergence (2 mks)
(ii) Sigma convergence (2 mks)
(iii) Conditional convergence. (2 mks)
(b) Briefly explain the Okun’s law (2 mks)
(c) Explain the meaning of Golden Rule level of capital. (2 mks)
(d) In the solow model, with the help of a graph explain how the rate of population
growth affects the steady –state level of income. (10 mks)
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