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AME820S- ADVANCED MACROECONOMICS- 2ND OPP- NOV 2023 |
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n Am I BI A u n IVE RSITV
OF SCIEnCE Ano TECHno LOGY
FACULTY OF COMMERCE, HUMAN SCIENCES AND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE
QUALIFICATION: BACHELOR OF ECONOMICS HONOURS DEGREE
QUALIFICATION CODE: 08HECO LEVEL:
8
COURSE CODE:
AME820S COURSE NAME: ADV AN CED MACROECONOMICS
SESSION:
JAN2024
PAPER:
THEORY
DURATION:
3 HOURS MARKS:
100
SECOND OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINER (S) Prof. T. Sunde
MODERATOR: Dr Reinhold Kamati
INSTRUCTIONS
1. Answer ALL the questions.
2. Write clearly and neatly.
3. Number the answers.
PERMISSIBLE MATERIALS
I.Ruler
2. Calculator
THIS QUESTION PAPER CONSISTS OF 4 PAGES INCLUDING THE COVER PAGE.
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QUESTION 1 [25 MARKS]
Assume a macroeconomy producing only two distinct goods: A and B. Using 2022 as the
base year, note that all quantities are measured in thousands (All calculations should be
rounded to the nearest tenth).
Product Quantity (2022)
Quantity (2023)
Prices (2022)
Prices (2023)
A
2,000
2,100
$400
$400
B
1,000
1,040
$2,000
$2,100
a) Analyse the data provided to compute both the nominal and real GDP growth rates for
2022 and 2023 to elaborate on the distinction between the two measurements. [7]
b) Using the GDP deflator method, determine and interpret the inflation rate (rr) for the
year 2023. Provide a brief discussion on how the GDP deflator offers insights into
price level changes in the economy.
[6]
c) Given that the money supply (M) stood at $10,000 in 2023, derive the velocity of
money for the year. Offer an overview of the implications of the calculated velocity
for macroeconomic activity and monetary policy.
[6]
d) Anticipating a policy direction from .the Central Bank for a targeted inflation rate (rr)
of 2% in 2024 and assuming the real GDP growth rate mirrors that of 2023, deduce
the necessary money supply growth rate for achieving this target. Calculate the exact
volume of money the Central Bank needs to introduce into the economy and discuss
the potential economic ramifications of this monetary intervention.
[6]
QUESTION 2 [25 MARKS]
Examine the dynamics of the Mundell-Fleming model within the context of fluctuating world
interest rates.
a) Identify the underlying factors and conditions that might lead to a surge in the world
interest rate, considering the assumption that the world operates as a closed economy.
Discuss the immediate and long-term implications of rising world interest rates on
global trade and investment flows.
[7]
b) Utilise the Mundell-Fleming model to delve into the effects of an increasing world
interest rate on a small open economy with a floating exchange rate. Analyse the
impacts on:
• Aggregate income
• Exchange rate
• Trade balance
Incorporate graphical illustrations to enhance clarity and provide a comparative analysis
of the scenario before and after the surge in the world interest rate.
[9]
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c) Contrast the insights from part (b) by evaluating the repercussions of a rising world
interest rate in a scenario where the small open economy operates under a fixed
exchange rate regime.
1. Explore the policy interventions that might be enacted to stabilise the economy.
[3]
ii. Assess the viability and sustainability of maintaining the fixed exchange rate
amidst fluctuating world interest rates.
[3]
111. Discuss potential pressures on foreign reserves and the role of international
financial institutions in such scenarios.
[3]
QUESTION 3 [25 marks]
a) Using the national mcome identity expenditure method, derive the equation
NX = S - I. In four sentences, explain its importance in understanding the relationship
between trade and capital flows.
[5]
b) Elucidate the relevance of the small open economy assumptions in the context of the
Namibian economy. How do these assumptions align with and aid in understanding
the economic dynamics of Namibia?
[5]
c) Given Namibia's part1c1pation m international trade, evaluate how the following
scenarios would affect Namibia's income (Y), investment (I), savings (S), and net
exports (NX).
1. In the wake of escalating tensions between Russia and Ukraine, raising fears
of a third world war, the rest of the world amplifies defence spending. Assess
the consequent effects on Namibia's economic variables.
[5]
11. Namibia reduced defence spending as a fiscal consolidation effort to balance
its budget. Analyse the immediate and potential long-term impacts on the
country's macroeconomic indicators.
[5]
111. The Bank of Namibia increased the repo rate, instigating a wave of pessimism
among the business community. Explore and expound on the ripple effects of
this on Namibia's economic landscape.
[5]
Go to next page.
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QUESTION 4 [25 marks]
a) Illustrate with a diagram and articulate why interest rates are not determined by
domestic savings and investment in a small open economy. Provide a clear
explanation anchored in the dynamics of capital mobility and global financial
markets.
[9]
b) With the aid of a small open economy model, delineate and expound upon the impacts
of the following policies on the trade balance, savings, investment, and capital flows:
1. Illustrate and clarify how an increase in domestic government spending
influences key economic variables within a small open economy framework.
[4]
11. Utilise the model to explain the macroeconomic effects in the small open
economy when foreign countries have a surge in fiscal spending.
[4]
m. Depict and elucidate the consequences of a rise in the demand for
investment on the small open economy's trade balance, savings, and capital
flows.
[4]
1v. Offer a detailed discourse on how expansionary fiscal policies, both
domestically and internationally, influence the real exchange rate, net
exports, and capital flows in a small, open economy.
[4]
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