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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:2011

1
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 3 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 302 MONETARY THEORY AND POLICY (SUNDAY)
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE (CASE)
It all started with the depreciating shilling and Kenyans watched as the shilling continued to weaken
against the dollar. This was later to be followed by rising inflation and nobody would exactly tell what
was wrong.
Some blamed it on the fuel (high cost of imported oil) while others blamed the Central bank accusing
the Governor of incompetence and inability to control the shilling (tame the weakening shilling). Then
it was time to act, serious drastic measures were adopted:
(i) The Central Bank suspended the dollar transactions by the commercial banks whom it accused
of hoarding the dollar for speculative purpose and instead decided to carry out the transactions.
(ii) The Central Bank increased the base lending rates.
Required:
(a) Discuss the implications of the above measures and how they have succeeded to taming the
shilling as well as reducing inflation. (15 Marks)
(b) In the attempt to solve the exchange rate, the rate of inflation could increase. Explain.
(5 Marks)
(c) Explain the determinants of money supply in the economy. (6 Marks)
(d) Describe the contributions of Milton Friendman’s to the quantity theory of money.
(4 Marks)
2
QUESTION TWO
(a) Explain the Kynesian theory of liquidity preference. (6 Marks)
(b) (i) Define the term credit multiplier as used in credit creation. (2 Marks)
(ii) Describe the limitations of credit creation by commercial banks. (6 Marks)
(iii) Describe the marginal productivity theory of interest rates. (6 Marks)
QUESTION THREE
(a) Define the term monetary policy. (2 Marks)
(b) Discuss four instruments of monetary policy used to control and regulate money supply by the
central banking authority. (8 Marks)
(c) What limits the successful application of these tools in the developing countries?
(10 Marks)
QUESTION FOUR
(a) Discuss briefly the theoretical relationship between money supply and inflation. (4 Marks)
(b) If money supply is a given economy equals 500 while the velocity and price equals 5 and 2
respectively. Determine the real and the nominal output. (4 Marks)
(c) What factors determines the rate of interest in the economy. (6 Marks)
(d) Discuss the consequential economic impacts of high and rising rates of interest. (6 Marks)
QUESTION FIVE
(a) Describe the Cambridge theory of money demand or the cash balance approach and clearly
explain the variables involved. (6 Marks)
(b) Explain why the Cambridge approach is considered superior to the Fisher’s quantity theory of
money demand. (6 Marks)
(c) (i) List down any items that are excluded from the money supply. (4 Marks)
(ii) Explain any 4 functions of money in the economy. (4 Marks)

Cfm 302 Monetary Theory And Policy Question Paper

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