1. a.

) From the following data, calculate national income by income method (5mks)
Items (Units of m)
1. Compensation of employees 800
2. Mixed income of self-employed 900
3. Net factor income from abroad - 50
4. Rent 350
5. Profit 600
6. Consumption of fixed capital 200
7. Net indirect taxes 250
8. Interest 450
9. Operating Surplus 1400

Gross domestic product = compensation of employees + mixed income of self-employed +

operating surplus (profit + interest + rent ) + consumption of fixed deposit + net indirect taxes

= 800 + 900 + 1400 (600+450+350) + 200 + 250

= sh. 3550

Gross national product (GNP) = Goss domestic product (GDP) + Net factor income from abroad
(NFIA)
= 3550 + (-50)
= sh. 3500

National net product (NNP) = Gross domestic product (GDP) – consumption of fixed capital
= 3500 – 200
= sh. 3300

NNP = NNP – net indirect tax

= 3300 – 250
= sh. 3050m

b.) From the following data, calculate national income by expenditure method (7mks)

Items (000)
1. Compensation of employees 1,200
2. Net factor income from - 20
3. Net indirect taxes 120
4. Profit 800
5. Private final consumption expenditure 2,000
6. Net domestic capital formation 770
7. Consumption of fixed capital 130
8. Rent 400
9. Interest 620
10. Mixed income of self-employed 700
11. Net exports - 30
12. Govt. final consumption expenditure 1,100
13. Operating surplus 1,820
14. Employer’s contribution to social security Scheme 300

GDP = Depreciation + private final consumption expenditure + net domestic capital formation +
net exports + Govt. final consumption expenditure.

= 130 + 2,000 + 770 + (- 30) + 1,100

= sh. 3,970
Gross national product (GNP) = Goss domestic product (GDP) + Net factor income from abroad
(NFIA)
= 3970 + (-20)
= sh. 3,950

NNP = GNP – consumption of fixed capital

= 3950 – 130
= sh. 3820

NNPFC = NNPMP – NIT

= 3820 – 120

= sh. 3700

2.) Given a hypothetical consumption function of the form:

Y = C + I0 + G0

C = α + β Yd

Where: Yd =Y–T

Y = Income

T = Taxes

Compute the equilibrium level of income and consumption (4marks)

Y = α + β + (Y – T) + G0

Y=c

α + β + (Y – T) + G0 = α + β

Y = C = T - G0

3.) You are given the following hypothetical information about the Commodity and Money
markets of a closed economy without government intervention.

The commodity market

Consumption function: C = 100 + 0.3Y

Investment function: I = 2,000 – 2.1r

The Money Market

Lt = 0.2Y (transaction demand for money function)

Ls = 10 – 2r (speculative demand for money function)

MS = 1,500 (money supply function)

a.) Derive the IS curve (1marks)

Y=C+I

Y = 100 + 0.3Y + 2,000 – 2.1r

Y – 0.3Y = 100 + 2,000 – 2.1r

0.7Y = 2,100 – 2.1r

Y = 3000 –3r

b.) Derive the LM curve (1marks)

Md = Mt + Ms

0.2y + 10 – 2r = 1,500
2r = 0.2y + 10 – 1,500
2r = 0.2y – 1,490

r = 0.1y - 745

c.) Derive the equilibrium level of income and rate of interest (4marks)

Equilibrium level of income:

Y = 3000 – 3r

Y = 3000 – 3(0.1y – 745)

Y = 3000 – 0.3y + 2235

Y + 0.3y = 3000 + 2235

1.3y = 5235

Y = 4,542.69

Equilibrium rate of interest:

Y = 3000 – 3r

4,542.69 = 3,000 – 3r

3r = 3,000 – 4,542.69

3r = -1,542.69

r = -514.23

d.) If the money supply is increased by 75, what would be the effect on the equilibrium
level of income and rate of interest? (4marks)

New money supply function:Ms = 1500 + 75 = 1575

0.2y + 10 – 2r = 1,575
2r = 0.2y + 10 – 1,575
2r = 0.2y – 1,565
r = 0.1y – 782.5
Equilibrium level of income:

Y = 3000 – 3r
Y = 3000 – 3(0.1y – 782.5)
Y = 3000 – 0.3y + 2347.5
Y + 0.3y = 3000 + 2347.5
1.3y = 5347.5

Y = 4113.46

Equilibrium rate of interest:

Y = 3000 – 3r
But y = 4113.46
Therefore:
4113.46 = 3000 – 3r
3r = 3000 – 4113.46

r = -371.15

4.) Explain how high level of saving and investment contributes to economic growth
(4Marks)

High level of Investment translates to expenditure on capital spending, thus a high level of
investment would influence the rate of economic growth because it is a component of aggregate
demand and more importantly influences the productive capacity of the economy.

If there is spare capacity, then increased investment and a rise in AD will increase the rate of
economic growth.

High level of saving leads to an increase in fixed capital. Subsequently, this would create the
flexibility with which operations can be expanded, which means that more people are able to be
employed and R&D becomes easily implemented, thus influencing growth in the economy