Question three (20 marks)

3.1. "Under a fixed exchange rate system and perfect capital mobility an increase in foreign interest rates will cause the level of domestic output to rise." Comment on this statement. (4)

3.2. Define or describe the following concepts. (6)

(a) Macroeconomics

(b) Stagflation

(c) Phillips curve

(d) Okun's law

(e)Marshall-Lerner condition

3.3 The Namibia economy is currently in a recession. At the same time, inflation has been falling. Use the IS-LM model to describe two reasons why this may have occurred. (10)

Question four (20 marks)

4.1. Use the WS (wage-setting) and PS (price-setting) relations to examine the effects of the following events on the natural rate of unemployment and on the real wage.

4.1.1. There is a technological innovation that makes workers more productive. (5)

4.2.2. Less stringent anti-trust enforcement (leading to less competitive markets). (5)

4.3. The impossible trinity suggests that a central bank can prevent a balance-of-payments

crisis by limiting the cross-border flows of capital. True or false? Explain your answer (4)

4.4. Define the AD curve and show graphically how the AD curve is derived. (6)