1. (a) The following information is provided for a certain economy.
C = 100 + 0.1Y – Consumption function
I = 70 – 10r – Investment function
G = 200 – Government expenditure
X = 320 – Exports
T = 30 + 0.2 y – Tax function
M = 20+ 0.4y – Import function
Md = 0.4Y – 0.1 r – Money demand function
Ms= 400 – Money supply
Required:
(i) Explain the meaning of IS and LM curves. [2 marks]
(ii) Derive the IS and LM equations. [6 marks]
(iii) Calculate the equilibrium income and interest rate. [4 marks]
(iv) Determine the equilibrium consumption [3 marks]
(b) Explain the main uses in measuring National income. [6 marks]
(c) Discuss the main determinants of investment. [9 marks]
2. (a) Using a well labeled diagram describe the circular flow of income in an open economy. [10 marks]
(b) Explain the features of prosperity phase of business cycle. [10 marks]
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