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Xea 407/Cec 403: Monetary Economics Question Paper

Xea 407/Cec 403: Monetary Economics

Course:Bachelor Of Economics

Institution: University Of Nairobi question papers

Exam Year:2013

University of Nairobi
First semester Examinations 20113/2014
Fourth year Examinations for the Degrees of Bachelor of Economics, Bachelor of Economics and Statistics and Bachelor of Arts
XEA 407/CEC 403: Monetary Economics
Date: December 11, 2013 Time: 3.00.P.M-5.00.P.M
Instructions:
This examination has FIVE questions.
Answer question one and any other two questions.

Question 1
a) Explain the following concepts
i. Legal tender
ii. Certificate of deposit
iii. Inflation targeting
iv. Excess reserves
v. Yield curve (15 marks)
b) Highlight the key assumptions on each of the 3 theories of the term structure of interest rates. (9 marks)
c) Show that M = mXMB, where m is the money multiplier and MB the monetary base.

Question 2
a) Using a well labeled graph show that supply shocks by themselves (without government intervention) cannot be the source of high inflation. (10 marks)
b) Can fiscal policy by itself produce inflation? Use a graph to demonstrate the effect of a one-shot permanent increase in government expenditure. (10 marks)

Question 3
a) Briefly explain the following concepts: (9 marks)
i. Absolute purchasing power parity
ii. Relative purchasing power parity
iii. Interest rate parity theory
b) What are the effects of international fisher effect? (6 marks)
c) Using a well labeled graph, show the response of exchange rate to an increase in foreign interest rate. (5 marks)

Question 4
a) Using a graph illustrate and explain interest rate targeting. (10 marks)
b) Why is price stability the primary focus of CBK? (5 marks)
c) Between hierarchical and dual mandate, which is better and why? (5 marks)

Question 5
a) How should CBK respond to an asset-price bubble? (5 marks)
b) Individuals are affected by monetary policy change in several ways. Which are the 3 direct effects? (9 marks)
c) Using a graph, show the response of aggregate output and interest rate to an expansionary fiscal policy. (6 marks)

Xea 407/Cec 403: Monetary Economics Question Paper

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