Economics Revision Questions Question Paper

Economics Revision Questions

Course:Cpa Part I

Institution: Strathmore Business School question papers

Exam Year:2004

MONEY AND BANKING

QUESTION TWENTY-NINE
a) Define Money and outline its major functions. (8 marks)
b) Explain the various motives of holding money. (6 marks)
c) What are the likely effects of an expansionary monetary policy in an economy. (6 marks)
(Total: 20 marks)

QUESTON THIRTY
a) You are given the following information about the commodity and Money markets of a closed economy without government intervention.

The commodity market
Consumption function:
C = 50 + 2/5Y
Investment function:
I = 790 – 21r

The Money Market
Precautionary and Transactions demand for money
MDT = 1/6 Y

Speculative demand for money
MDS = 1200 -18r

Money supply
MS = 1250

Required:
i) Determine the equilibrium levels of income and interest rate for this economy. (8 marks)
ii) Using a well labeled diagram, illustrate the equilibrium condition in part (i) above. (4 marks)

b) A central bank is largely referred by economists as the bank at the apex with monetary authority.
Clearly explain the major functions of a central bank. (8 marks)
(Total: 20 marks)

QUESTION THIRTY ONE
a) How do commercial banks ‘create credit’? What are the limitations to this credit creation?
(12 marks)
b) Explain the concept of liquidity trap (8 marks)
(Total: 20 marks)

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