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Cfm 302: Monetary Theory And Policy Question Paper

Cfm 302: Monetary Theory And Policy

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2009

1
UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 302: MONETARY THEORY AND POLICY
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) What is a liquidity curve (3 Marks)
b) Differentiate between active and idle money balances (2 Marks)
c) The banks in a certain economy choose to operate a 20% required reserve ratio and receive
extra cash deposits of Ksh 10m, assuming that the general public does not wish to hold cash
balances outside the banks. Required:
(i) How much of the Ksh 10m will the banks lend out (2 Marks)
(ii) If the amount lent out is re-deposited within the banking system, how much of the
latest deposits will be lent out by the banks (1 Mark)
(iii) How much deposits will ultimately be created (3 Marks)
(iv) By how much will total deposits have expanded (2 Marks)
(v) What is the size of the bank deposit multiplier (1 Mark)
(vi) How do banks try to balance between liquidity and profitability (2 Marks)
d) Describe the mop up process (10 Marks)
e) Explain two functions of the central bank (4 Marks)
2
QUESTION TWO
a) “Money is not demanded for the sake of it. Explain” (10 Marks)
b) Explain the demand for money according to keynes (10Marks)
QUESTION THREE
a) Write brief notes on the following:
i) Loanable funds theory of interest
ii) Crowding out effect (10 Marks)
b) With the aid of a diagram show the effect of increase in government expenditure from
Keynesian point of view (10 Marks)
QUESTION FOUR
a) Financial intermediaries play a key role in economic development of any economy.
Highlight five such roles. (10 Marks)
b) Outline four factors that have to remain constant for Fisher Equation of exchange to apply
(10 Marks)
QUESTION FIVE
a) Describe five reasons for the popularity of credit money (10 Marks)
b) Outline five objectives of monetary policies (10 Marks)

Cfm 302: Monetary Theory And Policy Question Paper

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