exam review question

  • 1Consider an economy with three goods – wheat, flour and bread. Wheat and flour are intermediate goods (non-durable capital goods) whereas bread is the only consumer good and no inventory of any good is maintained.
  • 2 Draw, label and explain the circular flow of income and expenditure.
  • 3 Explain Keynes’ theory of consumption expenditure (use a schedule or table if required). What implications does the value of the marginal propensity to consume have for the relationship between the amount of savings and the level of income?
  • 4 Explain the concept of the equilibrium level of output or real GDP. Why, according to Keynes, does its emergence require an equality between the amount of savings (income not devoted to consumption expenditure) and the amount of investment expenditure?
  • 5 Explain the concept of the full employment level of output. How is this concept different from that of the equilibrium level of output?
  • 6Assume an economy where the equilibrium level of output coincides with the full employment level. Now assume that there is a decline in the level of investment expenditure. Analyze the effects of this decline on the equilibrium level of output. In the process, also provide an explanation of the workings of the Keynesian multiplier.
  • 7Use the Aggregate Demand – Aggregate Supply framework to compare the Keynesian and the Classical Models of output and employment.
  • 8Explain the concept of the marginal efficiency of capital (use a numerical example if required).
  • 9Using the concept of the MEC, explain why the level of investment expenditure shares a negative relationship with the prevailing rate of interest in the Keynesian system.
  • 10Investment expenditure, for Keynes, is driven by animal spirits. Explain. What implications does this have for the attainment of full employment equilibrium?
  • 11Distinguish between necessary and idle cash balances. Why, according to Keynes, do individuals hold idle cash balances?
  • 12Derive the negative relationship between the amount of money held to satisfy the speculative demand for money and the rate of interest. What implications does the existence of this speculative demand for money have for attaining full employment?
  • 12cWhy, in the Keynesian system, do monetary and fiscal stimulus help in attaining full employment? What role does the multiplier play in this process?
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