W1-2-60-1-6

JOMO KENYATTA UNIVERSITY

OF
AGRICULTURE AND TECHNOLOGY
UNIVERSITY EXAMINATIONS 2023/2024
CAT FOR THE DEGREE OF MASTERS
HEMH3107/HECG3103/HEPL3107/HEE 3107/HESM3112:
ECONOMICS
APRIL 2024

NAME : NELLY BARASA

REG NO: HDE315-D1-2683/2023
COURSE : MSC. STRATEGIC MANAGEMENT.
UNIT : ECONOMICS
UNIT CODE: HESM3112

A. Discuss the factors that shift the demand curve for bonds

Wealth

The growth in economy results to increase in wealth. With increase in wealth comes desire to

invest including investing in bonds. Therefore, when the economy grows the demand of bond

increases causing a shift of the curve to the right. When wealth reduces, demand of bond decreases

causing a shift in the demand curve to the left.

Expected relative return

If the return on bonds rises relative to the return on alternative investments, it will result to a shift

in the bond demand curve to the right. When interest rates are expected to fall, the price of bonds

are expected to rise shifting bond demand to the right (Nielsen, 2023).

Inflation expectation

Expectation of inflation make the bond demand curve to shift left and supply to shift right. This is
because the lenders and people willing to invest in bonds tend to buy or lend more when inflation
is low and shy away when inflation is high.

Relative risks

The reduction in risk of bonds, the demand curve for bonds shift to the right. If risk of other assets

increases, demand for bonds shifts to the right.

Relative liquidity

The more liquid the bond, the higher the demand. Therefore, an increase in liquidity of bonds
causes the bond demand curve to shift out to the right and a decrease in the liquidity of other assets
and investments the demand curve shifts to the right

B. The concept of elasticity is an important one in economics. List three demand related
elasticities and provide a definition (including the formula) of each.
Elasticity is the measure of how sensitive an economic factor is to the changes in another
factor. Types include;
Price Elasticity of Demand

This is the measure of the responsiveness of quantity sought when prices vary. The quantity

requested for a product is affected by any change in the price of a commodity, whether it is a drop

or an increase.
Price Elasticity Demand= %Change in Quantity Demanded / %Change in prices

Income Elasticity of Demand

This is the measure of the sensitivity of the quantity demanded for a certain commodity to changes

in real income of the consumers who purchase the goods while all other factors remain constant.

Income elasticity of demand= %Change in Quantity Demanded / %Change in income.

Cross Elasticity of Demand

Demand of a commodity is affected by the prices of other items. Therefore, cross Elasticity

Demand is a term used to refer to the sensitivity of quantity requested of one good (X) when

the price of another commodity (Y) changes.

Cross Elasticity Demand= %Change in Quantity Demanded for one good(X) / Change in Price of

another Good(Y)

Suppose price of good X rises from E1.40 to E1.80, and the demand falls from 220,000 units to
180,000 units. Calculate the price elasticity of demand and comment on its magnitude.

P.E.D=%Change in Quantity Demanded/ %Change in prices

= 220,000 – 180,000 = 40,000

= 220,000 + 180,000
2 =200,000
=40,000
200,000 = 0.2 x100% =20%

=1.40 + 1.80 = 3.2

 2 =1.6
= 1.40-1.80 = -0.4

-0.4
1.6 = -0.25 x100% = -25%

= 20%
-25% = -0.8

C. Discuss the Keynesian and Monetarists' views on factors that cause the aggregate demand
curve to shift.

The Keynesian economists, founded by John Maynard, believe that the economy is best controlled
by manipulating the demand for goods and services. According to this proponents, consumption,
government expenditures and net exports affect the demand. The theory has developed to new
Keynesian theory which focuses on government expenditure and behavior of prices.

There are three principles of Keynesians;

• The aggregate demand is influenced by many economic decisions such as public and
private.
• Prices, especially wages, respond slowly to changes in supply and demand thus resulting
to periodic shortages and surpluses.
• The changes in aggregate demand whether anticipated or unanticipated have their greatest
short-run effect on real output and employment but not prices.

The Monetarists economists hold a strong belief that money supply, including physical
currency, deposits and credit is the primary factor that affect demand in an economy.

These economists, including Milton Friedman, emphasizes the role of monetary policy in
controlling the economy. The key aspects of monetarists theory include;
 Quantity theory of money- monetarists emphasize the relationship between the money
supply and inflation. According to this theory, changes in the money supply lead to
determination of price level.

Long- term relationship between money and price which is seen to be related.

The following factors affect this theory;

• Money Supply Growth: Monetarists argue that changes in the money supply have a direct

and significant impact on aggregate demand. An increase in the money supply, if not

matched by a corresponding increase in output, can lead to higher spending and inflation,

shifting the AD curve to the right. A decrease in the money supply can reduce spending

and shift the curve to the left.

• Inflation Expectations: Monetarists emphasize the importance of expectations in shaping

economic behavior. If individuals and businesses expect higher inflation in the future, they

may increase spending in the present to avoid higher costs later, leading to a rightward shift

in the AD curve.

• Interest Rates: While Monetarists agree that changes in interest rates can influence

aggregate demand, they often view interest rate adjustments as a mechanism to control the

money supply rather than as a direct tool to manage demand.

• Government Regulation: Monetarists advocate for minimal government intervention in

the economy and often criticize excessive regulation, which they believe can distort market

signals and hinder efficient allocation of resources. They argue that reducing regulatory

burdens can enhance productivity and promote long-term economic growth, indirectly

affecting aggregate demand.

References

Nielsen, B. (2023, 08 14). Understanding Interest Rates, Inflation, and Bond. Retrieved from
Understanding Interest Rates, Inflation, and Bond: www.investopedia.com