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Briefly explain the meaning of gross domestic product (GDP) and gross national product
(GNP). Decide and explain either GDP or GNP is better to measure the economic
performance of the country.
Using the standard production function, Y = f(K, L, R, T), and holding the resource base fixed, we can derive the result that: y - n = α(k - n) + t , where y = rate of GNI growth, n = rate of labor force (population) growth, k rate of growth of the capital stock, α capital elasticity of output (usually found to be constant), and t the effect of technological change (the Solow residual in empirical studies of sources of economic growth)
Show how the above result is obtained using the production function.
4. What would be the shape of:
(a) The IS curve if investment does not depend on the interest rate?
(b) The LM curve if the demand for money does not depend on interest rate?
(c) The LM curve if the demand for money does not depend on income?
5. Consider an economy with levels of aggregates as follows:
Consumption function: C = 0:8 (1 − t) Y
Tax rate: t = 0:25
Investment: I = 900 − 50r
Government expenditure: G¯ = 800
Demand for money: L = 0:25Y − 62:5r
Money supply: M = 1000
Price level: P = 2
(a) Derive the IS and LM equations.
(b) Determine the equilibrium levels of income and interest rate.
(c) Calculate the full government spending multiplier, αG.
(d) By how much income and interest change for a unit change in
government spending allowing the money and goods market to
interact?
(e) How do you account for the difference between the value of the
government spending multiplier in (b) and the change in income
in (d)? (Hint: What happens to investment?)
Differentiate between the classical and Keynesian approach to the macroeconomic issues
1. Explain the following terms.
(a) Liquidity trap
(b) Monetary accommodation
(c) The Marshall-Lerner condition
(d) Crowding out
(e) Monetary transmission mechanism
(f) Neutrality of money
(g) Sterilization
(h) Devaluation
1. In the traditional macroeconomic framework (under open or closed
economy), all macroeconomic variables can somehow be categorized as
part of the aggregate demand and aggregate supply with equilibrating
prices. List as many macroeconomic variables as possible and categorize them under sub-equilibrium and eventually under demand supply
framework. [Hint: Use the goods market, the money market, the labor
market equilibrium, and technology].
2. Transmission mechanism is the process by which changes in the monetary sector (money market) affects variables such as income in the real
sector (goods) market. Discuss.
3. Suppose a country targets an income level of Y ∗.
(a) Demonstrate, using graphs, that either fiscal or monetary policies
can be used to achieve the targeted level of income.
(b) What are the possible reasons for a country to opt for a particular
policy (fiscal or monetary) while both of them can yield similar
level of income?
4. A country faced an unexpected build-up of foreign exchange earning
following a positive price shock on the country’s main export in the international market. This gain was, however, accompanied by a soaring
inflation. How and under what conditions, if any, can the build-up of
the foreign exchange reserve trigger inflation?
5. Consider two authorities: the Ministry of Finance (MOF) of Ethiopia,
and the National Bank of Ethiopia (NBE). Suppose these authorities
have two major policy goals namely internal balance and external balance.
(a) What are the major targets under the goals of achieving internal
and external balances?
(b) To achieve the two goals, at least two policy instruments are required. Suggest two policy instruments of achieving the goals of
internal and external balances.
(c) The assignment problem: Using the Swan diagram, demonstrate
and discuss the conditions under which each authority is assigned
to the particular policy goal.
10. Distinguish between growth correlates and fundamental causes of growth.
11. Discuss how history, and aspiration failure explain differences in the
trajectory of economic growth of economies.
12. Consider two cultures X and Z. In culture X, parents live for their children and grandchildren where their current income is divided among
current consumption, saving for retirement, and investment in the education of their children. In culture Z, children are born as assets for
their parents so that the current generation expects to be taken care of by the future generation. Output produced by the younger generation is divided into proceed and bequest for parents, and investment
for future self-sufficiency.
(a) What is the direction of flow of resource of investment in the two
cultures?
