MACROECONOMIC THEORY II
EET 202: MACROECONOMIC THEORY II
DATE: Tuesday, 24th November, 2009 TIME: 2.00 p.m. – 4.00 p.m.
Answer question ONE and any other TWO questions.
a) Suppose that everyone in the economy at every interest rate decided to save more,
would this lead to unemployment (10 marks)
b) Demonstrate using the classical model how a decrease in the money supply, a
decrease in income velocity and a rise in the transactions demand for money
would affect prices, money wages and real variables (20 marks)
Briefly explain through the use of short notes the four pillars of classical model, use the
relevant economic methodologies where possible (20 marks)
Explain the lifecycle hypothesis of consumption; compare the major differences of this
hypothesis with the permanent income hypothesis of consumption. (20 marks)
a) Distinguish between balance of payments and balance of trade (3 marks)
b) Distinguish between current account and capital account of the balance of
payments. Mention the various items on both of these accounts (10 marks)
c) Under what conditions would devaluation improve the balance of payment
position in an economy (7 marks)
Due the current financial crises that is affecting the US, the senate has voted for a fiscal
stimulus to overcome the recessionary effects that have resulted thereof as advised by the
policy analyst. Explain via IS-LM model how the desired objective will be achieved.