05 Jun Question 1. The Canadian consumer confidence rebounded sharply i
Question
1. The Canadian consumer confidence rebounded sharply in September 2012. This is a significant rebound since the plunge in October 2008. According to some analysts, the good news from Europe and the jump in the stock market appear to have had an effect on Canadian consumer confidence.
A. Explain the various factors that buoyed the Canadian consumer confidence in 2012.
B. Explain and draw a graph to explain how a rise in consumer confidence can change real GDP and the price level in the short run.
C. If the economy was operating at full- employment equilibrium, describe the state of equilibrium after the increase in consumer confidence.
In what way might consumer expectations have a self-fulfilling prophecy
D. Why do changes in consumer spending play such a large role in the business cycle ?
E. Explain how the economy can adjust in the long run to restore full-employment equilibrium. Draw a graph to illustrate this adjustment process.
2.
A. Differentiate between monetary policy instruments and monetary policy tools.
B. Describe the two key tools of monetary policy, and describe how they would be used by the bank of Canada to implement a contractionary monetary policy.
3. The economy of Kenya is in recession, and the recessionary gap is large. The World bank hires you as its economist and ask you to
A. Describe the discretionary and automatic fiscal policy actions that might occur.
B. Describe a discretionary fiscal stimulation package that could be used that would not bring a budget deficit.
C. Describe the risks of discretionary fiscal policy in this situation.
D. Explain the argument that lower corporate tax rates can increase tax revenue in Kenya. Consider the Laffer Curve in your explanation.
4.
A. Explain the concept of the multiplier, and explain the role of the marginal propensity to save (MPS) in determining the size of the multiplier.
B. Explain how the size of the multiplier will change when one brings in the role of the marginal tax rates.
C. Using the concept in parts (a) and (b) above, calculate the slope of the AE curve and the size of the multiplier if MPS = 0.35. Then, calculate the revised slope of the AE curve and the multiplier when you know that the imports and the marginal tax rate will reduce the slope of the AE curve by another 0.20
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