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Hbc 2222: Monetary Theory And Practice Question Paper
Hbc 2222: Monetary Theory And Practice
Course:Bachelor Of Commerce
Institution: Dedan Kimathi University Of Technology question papers
Exam Year:2013
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DEDAN KIMATHI UNIVERSITY OF TECHNOLOGY
UNIVERSITY EXAMINATIONS 2010/2011
THIRD YEAR SEMESTER ONE EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
HBC 2222: MONETARY THEORY AND PRACTICE
DATE: 12TH AUGUST 2013 TIME: 2.00 PM – 4.00 PM
INSTRUCTIONS
1. Answer question ONE and any other TWO questions
2. Be neat, clear and orderly
QUESTION ONE – COMPULSORY
a) Define money and explain its major functions in a modern economy. (5 marks)
b) (i) Define real interest rate indicating its components and importance. (2 marks)
(ii) Explain briefly how interest rates might influence the economic decisions of
individuals, businesses and governments. (6 marks)
c) (i) Define monetary policy and explain four instruments used by the central bank in
its execution. (8 marks)
(ii) What factors might contribute to the lack of effectiveness of monetary policy in a
developing country like Kenya? (4 marks)
d) Explain Fisher’s quantity theory of money clearly indicating its assumptions and
importance in an economy under the monetarist assumptions. (5 marks)
(Total 30 marks)
QUESTION TWO
a) Distinguish between demand-pull and cost-push inflation clearly indicating their
causes and the reasons for making this distinction. (12 marks)
b) What are the adverse and positive effects of inflation? (8 marks)
(Total 20 marks)
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QUESTION THREE
a) With the aid of diagrams explain the Keynesian liquidity preference theory clearly
indicating the motives for holding money and the factors that influence the various
demands for money. (14 marks)
b) What are the main criticisms of the Keynesian liquidity preference theory of interest?
(6 marks)
(Total 20 marks)
QUESTION FOUR
The theories of interest rates suggest that there is one single interest rate in an economy, yet there exists a whole range of interest rates in an economy at any one time.
(i) Explain four different theories of interest rate determination. (12 marks)
(ii) How do you account for the existence of several interest rates in an economy at the
same time? (8 marks)
(Total 20 marks)
QUESTION FIVE
The commodity and money markets for an economy are defined by the following equations:
Commodity Market
Y = C + I C = 200 + 2/5Y I = 1900 – 12r
Where Y = income, C = Consumption, I = Investment, and r = interest rate.
Money Market
MDT = 1/2Y, MDS = 100 – 10r, MS = 1500.
Where MDT = Transactions and Precautionary demand for money
MDS = Speculative demand for money, and Ms = Money Supply.
Required:
i) Define IS and LM curves and explain their slopes. (4 marks)
ii) Derive the IS and LM functions for this economy (4 marks)
iii) What is the equilibrium income and the rate of interest for the economy?
(4 marks)
iv) Compute the equilibrium level of consumption, savings and investment and
comment on your results. (4 marks)
v) Calculate the effect on the level of income and the rate of interest of an
autonomous increase in investment by 100 . (4 marks)
(Total 20 marks)
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