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International Finance Question Paper
International Finance
Course:Master Of Education In Library Science
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF MASTER OF
ECONOMICS (INTERNATIONAL TRADE AND FINANCE)
EAE 513: INTERNATIONAL FINANCE
DATE: Wednesday 25th November, 2009 TIME: 9.00 a.m. – 12.00 noon
INSTRUCTIONS
Answer ALL questions.
Q1.
Due to the current global financial crisis, the dollar inflow from Kenyans in
Diaspora to the country dropped from $280.061 million for Jan – May 2008 to
$245.75 million for the same period in 2009 (CBK statement, 23/6/09). Partly
due to this, the Kenya shilling has depreciated from Ksh.68.7217 to the US dollar
on Friday 29/8/08 to Ksh.75.1925 to the US$ on Friday 16/10/09.
A Kenyan businessman had US$ 3 Million at his disposal for speculative
purposes, and the following were the foreign exchange rates on the international
money markets on 16/10/09:
1 pound Sterling=1.6245 US dollars
1Euro=1.4882 US dollars
1 US $=90.15 Japanese Yen
Source: Reuters, 29/8/08 and 16/10/09
Suppose the interest rate on a 90-day treasury bill of the Central Bank of Kenya
(CBK) for the 16th October 2009 issue was 8 percent per annum. And suppose
the 90-day forward exchange rate in Nairobi for January 2010 had been agreed
on October 16/10/09 at Ksh.76.012. Finally, suppose the Tokyo (Japan) 90-day
forward exchange rate for January 2010 had on 16/10/09 settled at 90.43 Yen.
The interest rate on the 16th October 2009 90-day government securities in Tokyo
was 3 per cent per annum.
a)
If the Kenyan businessman is a rational investor, which speculative
investment option between Nairobi and Tokyo will maximize his return?
(The answer should emerge from calculations)[15 marks]
b)
What are the economic implications of the drop in the shilling’s value on:
i.
Government revenue? (Explain clearly)[3 marks]
ii.
Kenya’s exports? (Explain clearly)[3marks]
iii.
The balance of payments (Explain clearly)
[3 marks]
c)
What are the policy implications of the drastic drop in the shilling’s value
on:
i.
The foreign exchange regime operating in Kenya? [3 marks]
ii.
The country’s promotion of exports strategy?
[3 marks]
Q2.
Given the following simple Keynesian Model:
Y = C + I + X – M
C = 60 + 0.8Y
I = 140
X = 120
M = 10 + 0.2Y
a)
(i)
By how much would income have to change in order to make
X = M (with no change in X)?[4 marks]
(ii)
By how much would autonomous investment change in order to
generate this change? [4marks]
b)
Suppose autonomous exports increase by 20. Calculate the impact upon
the current account.[6marks]
c)
How much would autonomous exports have to change in order to produce
an equilibrium income level at which the current account was in balance?[6 marks]
Q3.
a)
Draw the LM and IS curves and explain why they slope in opposite
directions.[4 marks]
b)
Use the IS-LM model to explain the impact upon income and the interest
rate of an increase in the money
supply.
[8
marks]
c)
If the short-term international capital flow are very responsive to the
interest rate, will the BP curve be steeper or flatter than is such capital
flows were unresponsive to the interest rate in Kenya? Explain clearly.
[8 marks]
Q4.
Given the money supply (Ms) = a(BR + C) ………… (1.0)
Where
BR = reserves of commercial banks
C = currency held by non-bank public
A = the money multiplier
Also, given the demand for money (Md) = f(?, P, I, W, E (p') …….. (1.1)
Where:
?=level of income in the economy
P=price level
i =interest rate
W=level of real wealth
E(p') =
the expected percentage change in price level
If the economy is experiencing a monetary equilibrium (i.e. Ms = Md), use the
monetary approach to balance of payments (BOP) to show what will happen to
the BOP, if the economy is at full employment, and the monetary authorities
decide to increase the money supply (by say using the central bank to buy up
treasury bonds held by commercial banks)
a)
Under a fixed exchange rate regime[15 marks]
b)
Under a flexible exchange rate regime
[15 marks]
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