Lic. Administracion

2010 Sample Examination (P-2)

ECONOMICS
ESSAYS: A. Climate change has now become the biggest threat to human civilization. In this essay you want to use your knowledge of microeconomics to analyse the causes of climate change and assess various measures that are suggested to deal with this problem. a. It is now agreed that excessive quantities of green house gases (GHG), which are generatedwhile producing other goods and services (for example, electricity produced using coal) has been the reason for climate change. However, markets are generally believed to lead to “optimal” supply of goods and services. Explain why there continues to be demand for energy that leads to excessive emissions of GHG. Can you draw a supply-demand graph to demonstrate your argument? b. Two importantmeasures that are suggested to reduce GHG supply are “carbon tax” and “cap and trade.” Under the latter, a limit is set on the total emission of GHG and individual producers that emit GHG are allowed to trade among themselves the permit to emit GHG, while ensuring that the total of such permits does not exceed the limit. It has been claimed that these two measures can produce the same outcome. Examinethe validity of this claim and draw graphs to prove your conclusion.

c. Coase Theorem tells that even in presence of externalities, private agents, under certain conditions, can enter into contracts among themselves yielding outcomes that are optimal. Discuss why the theorem did not prove valid in the case of GHG emissions. d. Coase Theorem further tells that distribution of initial rights doesnot matter in producing optimal outcome. Examine this proposition with regard to initial allocation of permit under “cap and trade” scheme mentioned in (b) above. In what ways the initial allocation matter or does not matter?

B. Before the global economic crisis, both economists and policy makers expressed concern over the widening of current account imbalances across major economies. Also inthe aftermath of the crisis, these imbalances remain a concern. As shown in the figure below, over the past decade (and also in preceding decades), these imbalances featured persistent deficits of the United States, matched by surpluses generated in particular by Japan, China and a number of other developing countries in Asia, as well as by major oil-exporters in the Middle East.

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2010Sample Examination (P-2)

ECONOMICS
Figure: Current account balances of major economies, 2002-2010 (in billions of United States dollars)
1500

1000 billions of US dollars
Other Middle East Developing Asia Japan Euro Area United States

500

0

-500

-1000 2002 2003 2004 2005 2006 2007 2008 2009 2010

In your essay: a. Discuss why economists and policy makers alike are concerned aboutthese global imbalances. b. Explain how the vast amounts of international reserves accumulated by China and a number of other developing countries are associated with the pattern of global imbalances. c. Discuss the role of exchange rate policy in adjusting the global imbalances. d. Discuss whether the fiscal stimulus packages adopted by the United States and China in response to the globalcrisis would have helped reduce the global imbalances in the short run or not.

C. In the current economic environment, the notion of a “liquidity trap” has again moved to the forefront. a. Explain and illustrate the policy problem that is referred to as a “liquidity trap” using the IS-LM framework. Describe and critically evaluate three macroeconomic policy options that could be effective inreviving economic activity in the presence of a “liquidity trap”.

b.

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2010 Sample Examination (P-2)

ECONOMICS
QUESTIONS: 1. A number of countries have experienced an increase in their foreign exchange reserves. a. Explain two possible reasons as to why countries might try to accumulate foreign exchange reserves. b. Outline two policy challenges that result from the existence of sizable...