Question

a) Write down and explain the export demand function. [8 marks]3. ‘In the Keynesian macroeconomic model, a key role is played by the consumption function’. Explain this statement. [8 Marks]

b)Why might the demand for money be affected by changes in interest rates? [8 marks]

Answer 1

ANS.1) Export demand function is as follows-

Y = f (X1, X2)

Where

Y = Quantity of country’s aggregate exports

X1 = Real world income

X2 = Relative price variable (Unit value of exports)

‘In the Keynesian macroeconomic model, a key role is played by the consumption function'

because the classic consumption function according to keynes suggests that consumer spending is fully determined by income and the changes in income.

if this is true then the aggregate savings should increase proportionally as gross domestic product grows over time.

Consumption Function-

C = A + MD

Here

C=consumer spending

A=autonomous consumption

M=marginal propensity to consume

D=real disposable income​

Much of the Keynesian model centers around the frequency with which a given population spends or saves new income.

The multiplier  the consumption function, and the marginal propensity to consume are each crucial to Keynes focus on spending and aggregate demand.

ANS.2)

The demand for money will be affected by changes in interest rates because at a lower interest rate more people will expect a rise in the interest rate which will lead to a fall in aftermarket bond prices.

And if the interest rates will be low peple will boroorw more from banks and when the interst rates will be high the people will borrow less.