UNIVERSITY OF MALTA
ISLANDS AND SMALL STATES INSTITUTE
MA (ISLANDS AND SMALL STATES STUDIES)
Academic Year 2006/2007
Semester 2
ISS-5026
Aspects of Microeconomics and Macroeconomics
with Special Focus on Size and Insularity Factors
29th May 2007
Time (3 hours)
Answer TWO questions from each section. Use a separate booklet for each
question.
SECTION A: Microeconomics
1. What are the factors which influence the demand for goods by households and supply of
goods by firms? How do interactions by consumers and suppliers affect market prices?
What is the purpose and the effect of an imposition of a price floor by government?
2. What do you understand by the law of diminishing returns? In what way are the short run
costs of production related to this rule? Why is it useful to consider economies of scale
when analysing the industrial structure of small countries?
3. Discuss the meaning of perfect competition, explaining how a firm maximises profit in the
short run and in the long run. What do you understand by productive and allocative
efficiency and what is their relationship to consumer welfare?
4. What do you understand by oligopoly? Why are consumers dtsadvantaged when firms
collude? Explain the use of the kinked demand curve in this market structure. What is
the likelihood of survival of collusions?
SECTION B: Macroeconomics
5. What do you understand by GDP and how is it measured? What is the difference
between annual GDP growth rate in nominal terms and in real terms? Why is it
important to measure GDP in real terms over time? Why is it important to measure
GDP per capita when comparing the stage of development between countries?
6. What is the relationship between consumption and disposable income in the
Keynesian consumption function? What do you understand by the permanent income
hypothesis and how does it defer from the Keynesian consumption function?
7. Discuss the relation between aggregate demand, aggregate supply and the general
level of prices. How can aggregate demand policies be inflationary? Why has
economic emphasis shifted to supply side policies?
8. Assume that the economy is open and governed, and characterised by the following
equations:
Equilibrium condition:
Y = C+I+G+X- M
Consumption function:
C=100 + 0.8 (Y-T)
Income tax equation
T = .2 Y
Imports
M = .4 Y
Autonomous expenditure:
E = I + G + X = 50 + 30 *6Q
where Y is income, C is consumption, T is income tax, I is autonomous investment, M is
Imports and X is Exports.
a. Derive an equation combining C, T, M and E, with Y as the subject of the
equation. Find the equilibrium level of income
b. Show how the equilibrium level of income is affected if exports increase by 10
units i.e. from 60 to 70. What is the value of the income multiplier?
c. Explain your results, referring to the situation of a country which is heavily
dependent on exports and imports