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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:2012
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DEDAN KIMATHI UNIVERSITY OF TECHNOLOGY
UNIVERSITY EXAMINATIONS 2012/2013
THIRD YEAR SEMESTER ONE EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
HBC 2222: MONETARY THEORY AND PRACTICE
DATE: 10TH AUGUST 2012 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
a) i) Define the money supply and explain the meaning of M3 as used in Kenya today.
(3 marks)
ii) Distinguish between money and barter and explain which is more advantageous
in a modern economy, giving reasons. (6 marks)
b) i) Distinguish between nominal and real interest rates and indicate their importance.
(4 marks)
ii) Explain the loanable funds theory of interest rates and its main criticisms.
(6 marks)
c) A major function of the central bank is the determination and execution
of a country’s monetary policy.
i) Define monetary policy clearly indicating its goals. (3 marks)
ii) Explain four major instruments used by the central bank in execution of
monetary policy. (4 marks)
iii) Explain the factors that might influence the effectiveness of monetary policy
in a developing country. (4 marks)
(Total 30 marks)
QUESTION TWO
a) Explain Fisher’s quantity theory of money clearly indicating its assumptions and
importance. (8 marks)
b) In an economy, 120 transactions with a value of Shs 480 were undertaken.
The money supply was only Shs 80. Explain how this was possible. (3 marks)
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c) Explain the Keynesian liquidity preference theory of interest rates distinguishing
carefully between the motives for holding money. (9 marks)
(Total 20 marks)
QUESTION THREE
a) Define the term inflation and indicate the most commonly used measure of inflation.
(2 marks)
b) Distinguish between demand-pull and cost-push inflation clearly indicating their
causes and the reasons for making this distinction. (10 marks)
c) Why is inflation considered as one of the most serious problems in most economies
and does it have any desirable effects? (8 marks)
(Total 20 marks)
QUESTION FOUR
a) Using monetarist assumptions, distinguish between direct and indirect transmission
mechanisms following an increase in the money supply. (12 marks)
b) Suppose an economy was experiencing the Keynesian liquidity trap. What would be
the effect of an increase in the money supply on output and employment? (2 marks)
c) While the shape of the aggregate demand(AD) curve is generally accepted by both
Keynesians and monetarists, the shape of the aggregate supply(AS) curve is a matter
of great controversy. Using AD-AS analysis explain how the less extreme advocates
of Keynesian and monetarist views explain the effects of an increase in the money
supply on output and the general price level. (6 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 of 100 . (4 marks)
(Total 20 marks)
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