Review Questions
Sectoral and Growth Analysis

 

  1. Explain the difference between the permanent income hypothesis and the traditional Keynesian propensity to consume approach. What are the differences for macroeconomic models between these different views on consumption behavior?

  2. What assumptions are needed so that the standard absolute income theory of consumption will generate a short run consumption curve that has a low marginal propensity to consume, but a long run consumption curve that has th3 marginal propensity to consume equal the average propensity to consume. Explain very carefully.

  3. What is the relative income theory of consumption? What does it say about the short run vs long run marginal propensity to consume? Explain how this theory may give asymmetrical behavior for a decrease in income vs an increase in income. How can the theory be altered to give symmetrical behavior?

  4. What is Friedman’s permanent income theory of consumption? How does it treat the marginal propensity in the short run vs the long run? Compare and contrast this theory with the relative income theory.

  5. The habit theory of consumption states that consumption is related to current income and last period consumption:

    6. C = ay + bc-1

    Show that the habit theory is indistinguishable from the permanent income hypothesis if permanent income is formed according to the following relation:

    Yp = y + by-1 + b2y-2 +b3y-3 + .....           b < 1

  6. Classical economists believed savings were dependent upon interest rates. Keynes argued that consumption is a stable function of disposable income. Are these views incompatible with one another? What role do interest rates play in consumption savings choice?

  7. What other considerations must be made in the life-cycle model to handle an uncertain age of death?

  8. According to the permanent income hypothesis, transitory income is saved. Yet, some investigators argue that transitory income is spent on durable goods. Explain this seeming contradiction.

  9. During recession, average propensity to consume is lower or higher than that in the normal year? Explain.

  10. It has been found out that people living in Sukhumvit area maintain a higher level of consumption than people living in Khlong Toey slum. Can it be said that the poor consume less while the rich consume more. If so, why, if not, why not.

  11. So many people in African countries are starving to death. This is partly because the countries have had a drought for several consecutive years. Food production cannot materialize and income cannot be generated. This incidence can be said to support the hypothesis that the African’s consumption schedule starts from the origin. Why or why not.

  12. The permanent income hypothesis and the life cycle hypothesis imply that a temporary decrease in value added tax would have a smaller expansionary effect than a permanent value added tax of the same magnitude. True or false or uncertain. Explain.

  13. The permanent income hypothesis is consistent with the fact that purchases of cars and other consumer durables rise with the transitory components of income. True, false or uncertain? Justify your answer.

  14. Discuss the “rules” for optimal investment decisions by private firms.

  15. What is the difference between the naïve and the so-called flexible accelerator theories of investment? Show how we can derive the final equation for the flexible accelerator with a number of alternative assumptions.

  16. For a given nominal rate of interest, how does an increase in the expected rate of inflation affect investment?

  17. Discuss the view that the modern theories of the demand for money and the supply of money are based on the same principles as the theory of investment.

  18. “The rules for sensible public finance are the same as those for sensible private finance. The government should pattern its behavior after of prudent business and households by constantly striving to reduce waste, increase efficiency and live within its income.” Discuss the statement, indicating where you agree and why and where you disagree and why.

  19. Suppose you are now consuming baht B per year and the government start a social security program. In the program, you receive baht B per year when you retire but you will have to pay taxes in equal amount, equal to the total amount of social security you will receive. Will you change your consumption pattern?

  20. In the above problem, the government is perceived to be doing the saving for individual. Suppose the government simply taxed current workers to pay for retired workers. Does this change the pattern of individual consumption. What happens to the net savings?

  21. Within the framework of the Keynesian model, discuss the impact of a permanent increase in government spending financed by

    1. an equivalent rise in taxes
    2. the sale of government securities to the public
    3. the sale of government securities to the central bank.

  22. Monetary policy works through changes in interest rate; fiscal policy works through changes in income. Therefore, to get a quick changes in GNP, fiscal policy is the better instrument.” Evaluate.

  23. In the past two years, the Thai economy experiences both a rapid rising rate of unemployment and a low degree of inflation. Can this phenomenon be explained by any of the theories of inflation that you are familiar with? Why or why not.

  24. Does a reduction of the tax on the sale of property have an impact on consumption? Explain.

  25. On the April’s fool day, the Thai government reduced a number of taxes, from income tax to value added tax and business tax. Use the macroeconomic theories you have studied analyze their impact on income, prices, employment and interest rate.

  26. Using ISLM and the production sector, analyze the effect of the recent world reduction on the production of oil, on income, price, and income distribution of the economy. You may specify any assumptions to your own convenience about the economy you are to analyze, but be sure that they are explicitly stated.

  27. How would interest payments on demand deposits affect the demand for money? How would it affect velocity?

  28. How would an increase in mugging affect the money supply?

  29. What is money? Why is money given more importance in macroeconomics than any other single commodity?

  30. Suppose the central bank wishes to stabilize the money supply and knows that the supply of and demand for money often shift randomly. Would the policy of increasing the base whenever interest rates rise be a good policy?

  31. “In The General Theory, Keynes postulates a supply function for labor, a demand function for money, and a consumption function, none of which is derived from the principles of neoclassical theories.” Explain and discuss if the conclusions of the model would be altered if those functions were replaced by functions derived from the neoclassical principles.

  32. It has been contended that increases in money wage rates that are greater than increase in labor productivity tend to be inflationary even in the absence of excessive aggregate demand. Comment on the validity of this, include in your answer:

    1. An explanation of the relationship between money wages, labor productivity and costs of production.
    2. A definition of inflation
    3. An explanation of the term “excessive aggregate demand”

  33. Review briefly what Phillips curves measure. What is the relationship between wage and price Phillips curves? List as many reasons as you can as to why Phillips curves may shift and explain briefly which way they shift and why.

  34. What is the difference between short run and long run Phillips curve? Explain. What does Friedman say about long run Phillips curves? In what sense, if any, can empirical measurements of the Phillips curve provide relevant evidence in the controversy between the Keynesian and Quantity theory approach to inflation.

  35. If the short run Phillips curve is fairly horizontal to the right of the natural rate, what implication does this have for inflation policy?

  36. “Inflation is always and everywhere a monetary phenomenon.” Is this a true description of all inflation? Why or why not?

  37. Explain why the expected rate of inflation affects the position of the aggregate supply curve.

  38. Explain briefly why you agree or disagree with each of the following statements.

    1. In the ISLM framework, the balanced budget multiplier can vary between zero and one.
    2. One benefit of an increased rate of monetary expansion is that it enables the public to hold more real money balance.
    3. The conditions for the aggregate demand curve to be vertical are the same as for the LM curve to be vertical.
    4. We can avoid the crowding out of investment that arises from an increase in government expenditure by increasing the money supply.

  39. Suppose the OPEC Cartel broke down, the price of oil fell drastically and the government did not use tariffs to keep out the cheap oil. Using ISLM and production sector to trace the effects on output and prices. You may specify any assumptions to your own convenience about the economy you are to analyze, but be sure that they are explicitly stated.

  40. Given the following situation in the economy: high rate of inflation, high energy prices, low rate of growth as measured by GDP, persistent trade and payments deficit, and excessive private and government spending, how would you, as an expert on economic matters, propose to the government to help solve the economic ills? You should back up your proposal package with a sound theoretical analysis.

  41. In a simplified macroeconomic model, income is determined by a-straight-line "aggregate demand" and a-45-degree-line "aggregate supply." (Samuelson's approach as appeared in most elementary texts). However, at a higher level of macroeconomic study, income is determined by IS and LM curves.

    1. What are the main differences between the two models?
    2. How is the income determined in the simplified model related to the income determined in the ISLM model?

  42. The consumption function in most simple economic models is as follows:

    43. C = c(y -t(y))

    Indicate to what extent the function represents an oversimplification of the reality. What modification do modern macro theorists suggests should be made to the equation to make it more adequately represent the reality?

  43. Analyze the effects of an expansionary fiscal policy using ISLM plus production sector with nominal wages in the following manner:

    1. Compare, in general, the effects of an increase in government spending vs a decrease ion tax.
    2. What difference does the slope of the LM curve make in influencing the effect of a fiscal expansion? Be specific.
    3. Does the way in which an increase in government spending is financed make any difference? Explain carefully.
    4. What empirical evidence do we have on the effects of fiscal expansion?

  44. Explain briefly

    1. What is the meaning and significance of the real balance effect?
    2. What are different theories about how a change in money influences economic activities?

  45. Show that the elasticity of the aggregate demand curve, (y/P)(dP/dy) is unity, if the demand for money is insensitive to the rate of interest but is proportional to income, that is, Lr = 0 and Ly = L/y.

  46. We know that in time of inflation there is a redistribution of wealth and income. Describe how the process works and who will gain or lose.

  47. Two economies A and B share the same technology for production which is linear homogeneous and exhibits positive, diminishing marginal products of capital. There is no technological progress. The population growth rate is 2 percent per annum in A and 3 percent in B. The saving income ratio is 10 percent in A and 12 percent in B. Compare

    1. the long run growth rate
    2. the long run wage rate
    3. the long run consumption per capita for the two economies

  48. What is the objective (ie what are we seeking) in Domar's theory of growth? How does this compare with the objective in Harrod's theory? Work through each one algebraically and find the equilibrium rate of growth. What is this growth rate of? What is the warranted rate of growth?

  49. Explain carefully what happens if the growth rate rises above the equilibrium growth rate. Do it again for the case when actual growth rate is too low. What are the implications of all of this? What are the basic assumptions of the Harrod-Domar growth theories?

  50. Show that the Harrod-Domar growth theories are nothing more than special types of multiplier-accelerator model.

  51. Explain the neoclassical growth theory and the golden rule of accumulation.

 

 

 

 

 

 
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