ST.

PETER’S UNIVERSITY
FACULTY OF BUSINESS AND MANAGEMENT
END OF SEMESTER EXAMINATIONS APRIL-MAY 2025
COURSE TITLE: BUSINESS ENVIRONMENT / MACROECONOMICS

YEAR OF STUDY: ONE

SEMESTER: TWO

QUESTION ONE

In the four-sector economy, C=120+0.8(Y-T), Xo=30, Io=185, M=50+0.1Y, Go=425 and T=30+0.4Y.

Find the,

a) Equilibrium level of income using Keynesian Approach(04marks)

Calculate the;

b) Government budget position. (01marks)

c) MPS (01marks)
d) APS (01mark)
e) Autonomous spending (03marks)
f) Trade balance (02marks)

Given that the full employment level of income is 2000,

a) Determine the recessionary or inflationary gap. (03marks)

b) By how much should the government increase or decrease its expenditure to eliminate the
gap above. (02marks)
c) Examine the factors that lead to an increase in the national income figures of a country.
(07marks)

To solve the given problem in a four-sector Keynesian economy (with government and
foreign trade), we'll use the provided information:

Given:

 Consumption: C=120+0.8(Y−T)C = 120 + 0.8(Y - T)

 Tax function: T=30+0.4YT = 30 + 0.4Y
 Investment (autonomous): I0=185I_0 = 185
  Exports (autonomous): X0=30X_0 = 30
 Imports: M=50+0.1YM = 50 + 0.1Y
 Government spending: G0=425G_0 = 425

(a) Equilibrium level of income (Keynesian approach)

In a four-sector economy:
Equilibrium is where Aggregate Demand (AD) = Y

Aggregate demand (AD) is:

AD = C + I + G + X - M

Substitute known functions:

1. Taxes: T=30+0.4YT = 30 + 0.4Y

2. Disposable income: Yd=Y−T=Y−(30+0.4Y) =0.6Y−30Y_d = Y - T = Y - (30 + 0.4Y)
= 0.6Y - 30

Now:

C=120+0.8(Y−T) =120+0.8(0.6Y−30) =120+0.48Y−24 =96+0.48YC = 120 + 0.8(Y - T) =

120 + 0.8(0.6Y - 30) = 120 + 0.48Y - 24 = 96 + 0.48Y

Imports: M=50+0.1YM = 50 + 0.1Y

So:

AD=C+I+G+X−M=(96+0.48Y)+185+425+30−(50+0.1Y)AD = C + I + G + X - M = (96 +
0.48Y) + 185 + 425 + 30 - (50 + 0.1Y)
AD=(96+185+425+30−50)+(0.48Y−0.1Y)=686+0.38YAD = (96 + 185 + 425 + 30 - 50) +
(0.48Y - 0.1Y) = 686 + 0.38Y

Set AD = Y for equilibrium:

Y=686+0.38Y⇒Y−0.38Y=686⇒0.62Y=686⇒Y=1106.45Y = 686 + 0.38Y \Rightarrow Y -

0.38Y = 686 \Rightarrow 0.62Y = 686 \Rightarrow \boxed{Y = 1106.45}

(b) Government Budget Position

Government budget balance = Tax revenue - Government spending

T=30+0.4Y=30+0.4(1106.45)=30+442.58=472.58T = 30 + 0.4Y = 30 + 0.4(1106.45) = 30 +

442.58 = 472.58 G=425G = 425 Budget position=T−G=472.58−425=47.58 (Surplus)\
text{Budget position} = T - G = 472.58 - 425 = \boxed{47.58\ (Surplus)}
(c) MPS (Marginal Propensity to Save)

We are given that:

C=120+0.8(Y−T)⇒MPC=0.8⇒MPS=1−MPC=1−0.8=0.2C = 120 + 0.8(Y - T) \Rightarrow \

text{MPC} = 0.8 \Rightarrow \boxed{MPS = 1 - MPC = 1 - 0.8 = 0.2}

(d) APS (Average Propensity to Save)

We calculate APS = S / Y

We know:
Y=C+S+T⇒S=Y−C−TY = C + S + T \Rightarrow S = Y - C - T

From earlier:

 Y=1106.45Y = 1106.45
 C=96+0.48Y=96+0.48(1106.45)=96+531.10=627.10C = 96 + 0.48Y = 96 +
0.48(1106.45) = 96 + 531.10 = 627.10
 T=472.58T = 472.58

S=Y−C−T=1106.45−627.10−472.58=6.77S = Y - C - T = 1106.45 - 627.10 - 472.58 = \

boxed{6.77} APS=SY=6.771106.45≈0.0061APS = \frac{S}{Y} = \frac{6.77}{1106.45} \
approx \boxed{0.0061}

(e) Autonomous Spending

Autonomous spending = sum of all intercept (constant) terms in the AD equation:

C=96+0.48Y(autonomous part=96)C = 96 + 0.48Y \quad (\text{autonomous part} = 96)

I0=185,G0=425,X0=30,M=50+0.1Y (autonomous M=50)I_0 = 185,\quad G_0 = 425,\quad
X_0 = 30,\quad M = 50 + 0.1Y \ (\text{autonomous M} = 50)
Autonomous Spending=C0+I0+G0+X0−M0=96+185+425+30−50=686\text{Autonomous
Spending} = C_0 + I_0 + G_0 + X_0 - M_0 = 96 + 185 + 425 + 30 - 50 = \boxed{686}

(f) Trade Balance

Trade Balance = Exports - Imports

 X=30X = 30
 M=50+0.1Y=50+0.1(1106.45)=50+110.65=160.65M = 50 + 0.1Y = 50 +
0.1(1106.45) = 50 + 110.65 = 160.65

Trade Balance=X−M=30−160.65=−130.65 (TradeDeficit)\text{Trade Balance} = X - M = 30

- 160.65 = \boxed{-130.65\ (Trade Deficit)}
(a) Recessionary or Inflationary Gap

Full employment level of income = 2000

Equilibrium income = 1106.45

Recessionary Gap=2000−1106.45=893.55\text{Recessionary Gap} = 2000 - 1106.45 = \

boxed{893.55}

(b) Required Change in Government Expenditure

We use the government spending multiplier:

kG=11−MPC(1−t)+MPMk_G = \frac{1}{1 - MPC(1 - t) + MPM}

Where:

 MPC = 0.8
 t = 0.4
 MPM = 0.1

kG=11−0.8(1−0.4)+0.1=11−0.8(0.6)+0.1=11−0.48+0.1=10.62k_G = \frac{1}{1 - 0.8(1 - 0.4)

+ 0.1} = \frac{1}{1 - 0.8(0.6) + 0.1} = \frac{1}{1 - 0.48 + 0.1} = \frac{1}{0.62}
kG=1.61k_G = 1.61

Required increase in G:

ΔG=Recessionary GapkG=893.551.61≈555.31\Delta G = \frac{\text{Recessionary Gap}}

{k_G} = \frac{893.55}{1.61} \approx \boxed{555.31}

So, government should increase expenditure by ≈ 555.31 units.

(c) Factors That Increase National Income (7 marks)

1. Increase in Investment – More capital goods production boosts AD and output.

2. Increase in Government Expenditure – Higher G raises aggregate demand directly.
3. Technological Advancement – Improves productivity, raising output with same
inputs.
4. Export Growth – Brings foreign income into the domestic economy.
5. Increased Consumption – Driven by rising incomes, confidence, or lower taxes.
6. Lower Interest Rates – Boost investment and consumption via cheaper credit.
7. Improved Infrastructure – Enhances production efficiency and reduces costs.

Would you like a graph to visualize the equilibrium income and gap?

QUESTION TWO
 a) “Macroeconomic policies are aimed at maintaining a steady (stable) level of aggregate
demand growth. Most schools of economic thought agree on this goal but they disagree
about the means of achieving it” in light of the above statement, explain the
macroeconomics schools of thought. (15marks)
b) In studying the aggregate economy, five key economic sectors are identified. Discuss those
sectors highlighting the contribution of each sector to the economy. (10marks)

Certainly! Here's a comprehensive and well-structured answer to both parts of your question.

a) Macroeconomic Policies and Schools of Thought (15 marks)

The goal of macroeconomic policy is to maintain stable aggregate demand (AD), which
supports economic growth, full employment, and price stability. While most economic
schools agree on this objective, they differ on how to achieve it—especially on the role of
government, markets, and monetary versus fiscal tools.

1. Classical School

 Core View: Markets are self-correcting and always move toward full employment
due to flexible prices and wages.
 Policy Stance: Government intervention is not needed. If aggregate demand falls,
lower wages and prices will restore full employment.
 Tools Favored: None (laissez-faire approach).
 Critique: Ignores real-world issues like sticky wages, rigidities, and time lags.

2. Keynesian School

 Core View: In the short run, prices and wages are sticky, and the economy can
remain below full employment.
 Policy Stance: Strongly supports government intervention to manage demand.
 Tools Favored: Fiscal policy—increased government spending and reduced taxes to
boost AD.
 Contribution: Explains recessions and unemployment effectively; central in post-
Great Depression policy.

3. Monetarist School

 Core View: Focuses on the money supply as the main driver of economic activity.
 Policy Stance: Markets are stable in the long run, but mismanagement of money
supply causes instability.
 Tools Favored: Monetary policy, especially controlling inflation through money
supply management.
 Key Economist: Milton Friedman.

4. New Classical School (Rational Expectations)

 Core View: People make rational economic decisions using all available information.
  Policy Stance: Anticipated government actions are ineffective since people adjust
behavior.
 Tools Favored: Minimal government intervention.
 Implication: Only unexpected policy changes have real effects.

5. New Keynesian School

 Core View: Builds on Keynesian ideas but incorporates rational expectations and
micro-foundations.
 Policy Stance: Supports active stabilization policies due to sticky prices and wages.
 Tools Favored: Both fiscal and rules-based monetary policies (e.g., inflation
targeting).

6. Supply-Side Economics

 Core View: Focuses on increasing aggregate supply through incentives for

production.
 Policy Stance: Reduce taxes and deregulate to encourage investment and work.
 Criticism: Can lead to income inequality and reduced public services.

Summary Table (Optional for clarity in exams):

School Role of Gov’t Main Tool View on Economy

Classical Minimal None Self-correcting

Keynesian Active Fiscal Can stagnate below full employment

Monetarist Limited Monetary Instability due to money supply

New Classical Minimal None Rational expectations

New Keynesian Active Both Sticky prices/wages

Supply-Side Minimal Tax cuts Focus on production

b) The Five Key Economic Sectors (10 marks)

In macroeconomics, the economy is divided into five major sectors, each playing a unique
role in influencing aggregate demand and supply.

1. Household Sector

 Role: Provides labour and consumes goods and services.

 Contribution:
o Major source of consumption demand, which is the largest component of
AD.
 o Supplies factors of production—labor, capital, land—to firms.
o Saves income in banks, enabling investment.

2. Business (Firms) Sector

 Role: Produces goods and services using resources from households.

 Contribution:
o Drives investment spending and economic growth.
o Pays incomes (wages, rent, interest, profits) to households.
o Innovates and increases productive capacity (aggregate supply).

3. Government Sector

 Role: Implements fiscal policies, provides public goods, and regulates economic
activity.
 Contribution:
o Collects taxes and spends on infrastructure, health, education.
o Acts as a stabilizer by managing demand through public spending and
taxation.
o Redistributes income and provides safety nets.

4. Foreign Sector

 Role: Represents trade and financial flows with other countries.

 Contribution:
o Exports bring foreign income, increasing AD.
o Imports provide variety and inputs for production.
o Trade balance affects national income and exchange rates.
o Allows access to foreign investment and technology.

5. Financial Sector

 Role: Channels funds from savers to investors, influencing capital formation.

 Contribution:
o Provides credit for consumption and investment.
o Supports monetary policy via interest rate adjustments.
o Facilitates liquidity and risk management.

Final Notes:

 These sectors are interconnected. For instance, households earn income from firms
and spend it on goods (firms) or save it in financial institutions.
 A shock in one sector (e.g., collapse in exports) can ripple through the rest.
QUESTION THREE
a) Derive the following economic variables.
i. Investment multiplier in four sector economy. (03marks)
ii. Government multiplier in three sector economy. (03marks)
iii. Tax multiplier in four sector economy. (03marks)
b) Investment multiplier refers to the number of times that an initial change in investment
expenditure multiplies itself to give a final change in income. In light of the above statement,
explain the characteristics of investment multiplier in low developed countries. (10marks)
c) Examine the impediments to successful attainment of investment multiplier in LDCs.
(06marks)

Certainly! Here's a full answer to your question, structured for clarity and detail as required.

a) Derivation of Economic Multipliers (9 marks)

i. Investment Multiplier in a Four-Sector Economy (3 marks)

A four-sector economy includes households, firms, government, and the foreign sector.

The national income identity:

Y=C+I+G+X-M

Consumption function (simplified):

C=C0+c(Y−T)C = C_0 + c(Y - T)

Imports:

M=M0+mYM = M_0 + mY

Where:

 cc = Marginal Propensity to Consume (MPC)

 mm = Marginal Propensity to Import (MPM)
 tt = Marginal Tax Rate

Let’s derive the investment multiplier (k_I).

Net income = Yd=Y−T=Y−tY=(1−t)YY_d = Y - T = Y - tY = (1 - t)Y

So:

C=C0+c(1−t)YC = C_0 + c(1 - t)Y

Then,
Y=C0+c(1−t)Y+I+G+X−(M0+mY)Y = C_0 + c(1 - t)Y + I + G + X - (M_0 + mY)

Group Y terms:

Y−c(1−t)Y+mY=C0+I+G+X−M0Y - c(1 - t)Y + mY = C_0 + I + G + X - M_0 Y[1−c(1−t)

+m]=C0+I+G+X−M0Y[1 - c(1 - t) + m] = C_0 + I + G + X - M_0

The investment multiplier is the change in Y from a change in I:

kI=11−c(1−t)+mk_I = \frac{1}{1 - c(1 - t) + m}

ii. Government Expenditure Multiplier in a Three-Sector Economy (3 marks)

In a three-sector economy (Households, Firms, Government), the national income identity

is:

Y=C+I+GY = C + I + G

Consumption:

C=C0+c(1−t)YC = C_0 + c(1 - t)Y

So:

Y=C0+c(1−t)Y+I+GY = C_0 + c(1 - t)Y + I + G

Bring Y terms to one side:

Y−c(1−t)Y=C0+I+GY - c(1 - t)Y = C_0 + I + G Y[1−c(1−t)]=C0+I+GY[1 - c(1 - t)] = C_0 + I + G

So the government expenditure multiplier is:

kG=11−c(1−t)k_G = \frac{1}{1 - c(1 - t)}

iii. Tax Multiplier in a Four-Sector Economy (3 marks)

The tax multiplier shows the change in income resulting from a change in taxes (T).

From earlier, income identity is:

Y=C0+c(1−t)Y+I+G+X−M0−mYY = C_0 + c(1 - t)Y + I + G + X - M_0 - mY

We already had:

Y[1−c(1−t)+m]=C0+I+G+X−M0Y[1 - c(1 - t) + m] = C_0 + I + G + X - M_0

Let’s focus on tax:

A change in tax ΔT\Delta T affects disposable income and hence consumption:

ΔY=kT⋅ΔT\Delta Y = k_T \cdot \Delta T

The tax multiplier (k_T) is:

kT=−c1−c(1−t)+mk_T = \frac{-c}{1 - c(1 - t) + m}

It's negative because higher taxes reduce disposable income and hence national income.

b) Characteristics of Investment Multiplier in LDCs (10 marks)

In Less Developed Countries (LDCs), the effectiveness of the investment multiplier is often
limited due to the following characteristics:

1. Low Marginal Propensity to Consume (MPC) Locally

 Although people in LDCs tend to consume a large portion of their income, much of it
may go to basic survival needs or imported goods, reducing the local multiplier
effect.

2. High Marginal Propensity to Import (MPM)

 Many goods are imported due to weak local industries, so extra income leaks out of
the economy, limiting domestic income generation.

3. Unemployment and Underemployment

 Multiplier effects can be stronger in LDCs with high unutilized labor, but
underdeveloped markets often prevent this labor from being absorbed efficiently.

4. Poor Infrastructure

 Investments do not spread benefits widely due to inadequate transport, energy, and
communications.

5. Weak Financial Institutions

 Even when investment increases income, limited access to credit prevents follow-up
investment and consumption.

6. Low Productivity

 The labour force may lack skills or technology, reducing the efficiency and effect of
initial investments.
7. Narrow Market Base

 Limited aggregate demand means that even productive investment doesn’t always
generate further income or employment growth.

8. Inequality

 Income from investments often goes to the wealthy, who tend to save more than
spend, reducing the multiplier effect.

9. Inflationary Pressures

 In LDCs, investment-induced demand can raise prices (due to supply bottlenecks)

rather than output.

10. Time Lags

 Investments take longer to mature in LDCs, meaning delayed effects on income and
employment.

c) Impediments to the Success of Investment Multiplier in LDCs (6

marks)

Here are key barriers that limit the effectiveness of the multiplier:

1. High Import Dependency

 Increases in demand lead to import growth, not domestic production, resulting in

leakages from the income stream.

2. Inadequate Infrastructure

 Poor roads, electricity, and communication delay or reduce productivity of new

investments.

3. Low Skill Levels

 Labor force lacks training to absorb new jobs or capital, limiting expansion of
output.

4. Weak Institutional Framework

 Corruption, red tape, and poor governance can misdirect investment funds, reducing
efficiency.

5. Poor Financial Systems

  Lack of access to affordable credit limits entrepreneurial response to increased
demand.

6. Supply-Side Constraints

 Limited local production capacity causes bottlenecks and inflation rather than
output growth when investment rises.

Would you like a concise summary or mind map to help with revision?

QUESTION FOUR
a) A central bank is a financial institution established by the government whose aim is to
control the quantity and use of money in the economy as a way of facilitating the
implementation of the monetary policy. Basing on the above statement, discuss the bank
tier system. (08marks)
b) In any country, monetary policy measures are enforced by the central bank in the
management of demand and supply in order to influence the level of economic activity. In
light of the above statement, explain the aims of monetary policy, Justify your answer.
(10marks)
c) Give and explain any four assets and liabilities of commercial banks. (07marks)

(Explain each in details)

Certainly! Below is a detailed and structured answer to your question, covering all parts
clearly.

a) The Bank Tier System (8 marks)

The bank tier system refers to the categorization of banks based on the scope of their
operations, capital requirements, and regulatory supervision. In most countries
(including Uganda and others), the central bank classifies banks into tiers to promote
financial stability, inclusion, and oversight.

Tier 1: Commercial Banks

 Definition: Fully licensed banks offering a wide range of financial services including
accepting deposits, issuing loans, foreign exchange, and credit cards.
 Supervision: Regulated by the Central Bank under strict capital adequacy and
reporting requirements.
 Examples: Stanbic Bank, Centenary Bank.
  Contribution: Major players in monetary transmission and credit creation.

Tier 2: Credit Institutions

 Definition: Offer deposit accounts and loans but are not allowed to offer checking
(current) accounts or deal in foreign exchange.
 Target: Small- and medium-sized enterprises (SMEs).
 Supervision: Licensed by the Central Bank with less stringent requirements than Tier
1.

Tier 3: Microfinance Deposit-Taking Institutions (MDIs)

 Definition: Provide micro-loans and savings services to low-income earners.

 Services: No foreign exchange or checking accounts allowed.
 Purpose: Promote financial inclusion in rural/low-income areas.
 Supervision: Regulated by the Central Bank, with tailored compliance rules.

Tier 4: Non-Deposit Taking Microfinance Institutions and SACCOS

 Definition: Comprise money lenders, SACCOs (Savings and Credit Cooperative

Organizations), and community-based lenders.
 Services: Loans and savings services but not regulated by the Central Bank (regulated
by Tier 4 Microfinance Institutions Authority).
 Risks: Higher potential for abuse due to weak oversight, but crucial for financial
access at the grassroots.

b) Aims of Monetary Policy (10 marks)

Monetary policy is the use of interest rates, money supply, and credit controls by a central
bank to influence macroeconomic variables. The key aims include:

1. Price Stability

 Goal: Control inflation and deflation.

 Justification: Stable prices preserve the purchasing power of money and create a
conducive environment for investment.

2. Full Employment

 Goal: Ensure high levels of employment.

 Justification: Unemployment leads to wasted resources and increased poverty; low
interest rates can boost job-creating investments.

3. Economic Growth

 Goal: Sustain a steady rate of increase in GDP.

  Justification: Expansion of productive capacity leads to better standards of living.
Monetary policy stimulates investment and consumption to boost growth.

4. Balance of Payments Stability

 Goal: Avoid persistent trade deficits or surpluses.

 Justification: Influences the exchange rate and foreign reserves. A tight monetary
policy can reduce imports and improve trade balance.

5. Financial Market Stability

 Goal: Prevent financial crises and ensure banking sector soundness.

 Justification: Stable financial systems promote investor confidence and safeguard
public deposits.

6. Control of Money Supply and Credit

 Goal: Prevent excessive credit expansion or contraction.

 Justification: Helps avoid inflation, asset bubbles, or credit crunches.

7. Promoting Investment

 Goal: Maintain low and stable interest rates.

 Justification: Reduces borrowing costs, encouraging businesses and consumers to
invest and spend.

c) Assets and Liabilities of Commercial Banks (7 marks)

Assets (Resources Owned by Banks)

1. Loans and Advances

 Definition: Money lent to individuals, businesses, or other entities with interest.

 Importance: Main source of income for banks through interest earnings.

2. Cash Reserves

 Definition: Cash held by the bank, either in its vaults or deposited with the central
bank.
 Importance: Ensures liquidity and meets regulatory reserve requirements.

Liabilities (Obligations of Banks)

3. Customer Deposits

 Definition: Funds deposited by customers in checking, savings, or fixed accounts.

 Types: Demand deposits (withdrawable anytime), time deposits (fixed period).
  Importance: Main source of funds for banks’ operations.

4. Borrowings

 Definition: Money borrowed from other banks, the central bank, or international
financial institutions.
 Purpose: Used to manage liquidity shortages or fund large projects.
 Obligation: Must be repaid with interest.

Would you like a summarized table or diagram showing assets and liabilities of commercial
banks for easier memory?

QUESTION FIVE
a) Uganda’s economy currently experiences fluctuations and these are the upward and
downward movements of various economic variables which also lead to fluctuations
in majorly prices and output. Uganda equally has a vibrant plan to manage the
current economic instability. However, in real practice, aggregate output (GNP) does
not grow rapidly. In light of the above statement, explain the reasons as to why
scarcity and an increase in fuel prices have led to global economic crisis. (12marks)
b) Assuming there is a progressive fluctuation in fuel prices causing a hyper type of
inflation. What impact would it cause on an economic variable such as
unemployment? Illustrate your answer with a diagram (08marks)
c) Suggest any five recommendations to combat the ever-escalating fuel crisis in
Uganda. (05marks)

Certainly! Here is a complete, well-explained answer to your multi-part question, suitable for
exam-level writing.

a) Why Scarcity and Increase in Fuel Prices Have Led to a Global

Economic Crisis (12 marks)

An increase in fuel prices and the scarcity of oil significantly contribute to global economic
instability for the following reasons:

1. Increased Production Costs

 Fuel is a critical input in industries such as transport, manufacturing, and

agriculture.
  When fuel prices rise, production and distribution costs increase, leading to higher
prices for goods and services (cost-push inflation).

2. Reduced Consumer Purchasing Power

 As energy and fuel costs rise, households spend more on transport and energy
bills, leaving less income for other goods, reducing demand.

3. Inflationary Pressures

 Persistent fuel price increases lead to general inflation.

 Inflation erodes real wages and savings, discouraging investment and consumption.

4. Trade Imbalances

 Oil-importing countries like Uganda face widening trade deficits due to increased
import bills.
 This strains foreign exchange reserves and can cause currency depreciation.

5. Disruption of Supply Chains

 Fuel scarcity causes delays and transportation bottlenecks, particularly in

landlocked countries.
 This disrupts the flow of goods and services, reducing overall productivity.

6. Monetary Policy Dilemma

 Central banks face pressure to increase interest rates to contain inflation, but this can
suppress growth and investment.

7. Political and Social Unrest

 High fuel prices can cause public protests, strikes, and political instability, as seen in
several countries.
 Subsidy pressures on government budgets may rise, causing fiscal strain.

8. Global Interdependence

 Oil is globally traded, so price increases affect all nations. Poor countries feel the
greatest impact due to limited shock absorbers (e.g., reserves or subsidies).

b) Impact of Fuel Price Hikes on Unemployment with Diagram (8

marks)

Hyperinflation and Unemployment Relationship

When fuel prices rise drastically (hyperinflation), the cost of production skyrockets. Firms
respond by:

 Laying off workers to cut costs.

 Delaying expansion or closing operations due to falling profitability.
 Reduced consumer spending leads to lower demand for goods/services, which
further reduces employment.

This creates cost-push inflation and higher unemployment, a situation known as

stagflation.

Illustration (Diagram):

The following AS-AD diagram illustrates the effect:

Description of the diagram:

 The Aggregate Demand (AD) curve slopes downward.

 The Aggregate Supply (AS) curve shifts leftward due to increased fuel costs.
 The equilibrium moves from E1 to E2, causing:
o Price level to increase (from P1 to P2).
o Output (GDP) to decrease (from Y1 to Y2).
o This fall in output corresponds to rising unemployment.

Let me know if you'd like me to provide this diagram visually.

c) Recommendations to Combat Fuel Crisis in Uganda (5 marks)

1. Diversification of Energy Sources

 Invest in renewable energy such as solar, hydro, and biofuels.

 Reduces dependence on imported fossil fuels and enhances energy security.

2. Regional Oil Refining

 Speed up development of the Uganda Oil Refinery to reduce reliance on imported

petroleum.
 Locally refined fuel is cheaper and can generate employment and tax revenues.

3. Strategic Fuel Reserves

 Create national fuel reserves to cushion the economy against global price shocks.
 These reserves help stabilize prices temporarily during crises.

4. Efficient Public Transport System

  Invest in reliable, low-cost mass transit systems (e.g., buses, trains).
 Reduces individual car use and fuel consumption, especially in urban areas.

5. Tax Incentives and Subsidies

 Offer tax breaks to companies investing in clean energy or fuel-efficient

technologies.
 Temporary fuel subsidies can protect vulnerable groups but should be well-targeted
to avoid fiscal strain.

Let me know if you'd like a diagram for the AS-AD model or a summary table for easier
revision.

QUESTION SIX
a) Write shorts on the following economic terms (2.5marks @)
i. Economic growth and economic development
ii. National income at factor cost and national income at market price
b) In economic growth model analysis, Rostow’s theory explains the path of growth in a
historical perspective and classified societies according to their different levels of
economic growth. Critically evaluate the above statement. (10marks)
c) In environmental analysis, several components can be determined i.e., Analysis of
the general environment, industry analysis among others. Discuss the factors that
determine the economic segment in the general environmental analysis. (10marks)
(Explain each in details)

Sure! Here's a well-structured response to your question, with each part explained clearly and
in detail as required.

a) Short Notes on Economic Terms (5 marks total – 2.5 each)

i. Economic Growth vs. Economic Development

 Economic Growth:
o Refers to the quantitative increase in a country’s output of goods and
services (GDP or GNP) over time.
o It is measured in real terms, often annually, and does not necessarily
indicate improved living standards.
o Example: A 5% increase in Uganda’s GDP in a given year.
  Economic Development:
o A broader concept that includes economic growth along with qualitative
improvements such as reduced poverty, improved education, health care, and
income distribution.
o It focuses on human well-being, structural transformation, and social
progress.
o Example: Improved literacy rates, life expectancy, and infrastructure
development.

Key Difference: Growth is quantity-focused; development is quality-focused and includes

growth plus social indicators.

ii. National Income at Factor Cost vs. National Income at Market Price

 National Income at Factor Cost:

o Measures income earned by factors of production (wages, rent, interest,
profit) excluding indirect taxes and including subsidies.
o It reflects the actual earnings of citizens before government interventions.
o Formula:

National Income at Factor Cost=National Income at Market Prices−Indirect Taxes+Su

bsidies\text{National Income at Factor Cost} = \text{National Income at Market
Prices} - \text{Indirect Taxes} + \text{Subsidies}

 National Income at Market Price:

o Refers to the total market value of all final goods and services produced in an
economy, including indirect taxes and excluding subsidies.
o It reflects what consumers actually pay for goods and services.

Key Difference: Market price includes taxes and excludes subsidies, whereas factor cost
excludes taxes and includes subsidies.

b) Rostow’s Stages of Economic Growth – Critical Evaluation (10

marks)

Overview of Rostow’s Theory:

Rostow’s model presents five linear stages of development that all countries supposedly pass
through:

1. Traditional Society – Subsistence economy, limited technology.

2. Preconditions for Take-off – Infrastructure, education, and investment begin.
3. Take-off – Rapid growth in select sectors, industrialization starts.
4. Drive to Maturity – Economy diversifies, technology spreads, investment increases.
 5. Age of High Mass Consumption – Shift to consumer-oriented economy and
services.

Critical Evaluation:

1. Strengths:

 Historical relevance: Based on real transformation in Western countries.

 Clear structure: Offers a step-by-step roadmap of how economies transition from
agrarian to industrial to service-based.
 Policy guidance: Helps governments identify necessary conditions for development
(e.g., savings, investment, infrastructure).

2. Limitations:

 Eurocentric Model:
o Based on Western historical experiences; may not apply to Africa or Asia,
where socio-political conditions differ.
 Ignores Institutional and Cultural Factors:
o Does not consider corruption, conflict, poor governance, or cultural barriers
that could delay development.
 Assumes Linear Progression:
o Implies all countries follow the same path, which ignores unique challenges
and paths in developing countries.
 Neglects External Influences:
o Overlooks the role of colonialism, globalization, foreign debt, and trade
imbalances.
 Understates Environmental and Social Issues:
o Focuses on industrial growth, often ignoring sustainability, inequality, or
social well-being.

3. Relevance Today:

 Some LDCs are stuck in the preconditions or take-off stage due to weak institutions
and resource limitations.
 However, the model remains useful in understanding development dynamics,
especially for policy comparison.

c) Factors Determining the Economic Segment in General

Environmental Analysis (10 marks)

The economic segment of environmental analysis refers to macro-level economic factors

that influence an organization or nation’s performance. These factors shape business
strategies, investments, and policy directions.
1. Economic Growth Rate

 Determines market potential and business expansion.

 A high growth rate encourages investment and job creation, while recession limits
spending and production.

2. Inflation Rate

 Measures the rate of price increase over time.

 High inflation erodes purchasing power, increases business costs, and affects interest
rates.

3. Interest Rates

 Affects cost of borrowing and consumer spending.

 High interest rates discourage loans and investment, while low rates stimulate
borrowing and expansion.

4. Unemployment Rate

 Reflects labor market health.

 High unemployment implies underutilized labor and weak demand; low
unemployment indicates economic efficiency.

5. Exchange Rates

 Affects export and import competitiveness.

 A weak domestic currency boosts exports but raises import costs; a strong currency
does the opposite.

6. Consumer Confidence and Spending

 Indicates how optimistic consumers are about their financial future.

 High confidence leads to more consumption and investment.

7. Fiscal and Monetary Policy

 Government taxation, spending, and monetary controls directly impact economic

conditions.
 Expansionary policies can boost demand; contractionary policies control inflation.

8. National Income and Per Capita Income

 Shows the average income level, affecting demand patterns, savings, and investment.

9. Balance of Trade

 A deficit may indicate over-reliance on imports and outflow of foreign exchange.

 A surplus indicates strong exports and national competitiveness.
10. Technological Advancement (Indirect Economic Effect)

 Technological progress boosts productivity, reduces costs, and fosters innovation-

driven growth.

Would you like a summary table comparing economic growth models or a visual chart for
Rostow’s stages?