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Bac608: International Money And Banking Question Paper

Bac608: International Money And Banking

Course:Master Of Economics

Institution: Kenyatta University question papers

Exam Year:2012

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2011/2012
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF MASTER
OF SCIENCE IN FINANCE
BAC 608:
INTERNATIONAL MONEY AND BANKING
=================================================================
DATE: WEDNESDAY 4TH APRIL 2012
TIME: 5.30 P.M. – 8.30 P.M.

INSTRUCTIONS
? Answer ALL the questions.
? Ensure your work is neat and tidy

Question One (20 marks)
a)
Which definition of money supply, M1 or M2, is most appropriate if most important
function of money is its role as medium of exchange? Give reasons for your answer

(4 marks)
b)
When interest rates rise there is a tendency for people to switch their money out of
demand deposits and other chequable deposits into money market deposit accounts
and money market mutual funds.
Required

Explain clearly how this affects the following and implication on the level of
aggregate demand

i)
Money supply as define by M1

(5 marks)

ii)
Money supply as defined by M2

(5 marks)

c)
Suppose a country like Tanzania were to adopt Kenya shilling as its own currency,
explain how the ksh money supply would be affected.

(6 marks)

Page 1 of 3

Question Two (20 marks)
a)
A zero coupon bond with a face value of $10,000 that matures in 2 years goes on sale
today for $9,100.

Required

i)
Determine the bond’s yield to maturity

(4 marks)
ii)
If within an hour of purchasing this bond the interest rate changes to 5
percent and then decided to sell the bond, determine the profit (loss) you
expect to make.

(2 marks)

b)
i)
What is liquidity risk?

(2 marks)

ii)
How do banks solve liquidity problems

(2 marks)

c)
i)
How are Eurodollars created?

(2 marks)

ii)
Explain how banks can overcome tight money regulations.
(3 marks)

d)
Briefly explain the functions of financial intermediaries in an economy. (5 marks)

Question Three (20 marks)
a)
Consider the equation of exchange with a fixed velocity and real GDP that grows at 2
percent per year. Each year the central bank increases the quantity of money by 3
percent.
Required
If the equilibrium real interest rate is 6 percent, what is the equilibrium nominal
interest rate?

(4 marks)

b)
i)
Define the IS curve. Explain the factors that determine the slope or steepness
of IS curve.

(4 marks)

ii)
What is LM curve. Explain the factors that determine the slope of LM curve

c)
Explain how the government can alleviate the problems associated with economic
recession.

(8 marks)
Page 2 of 3

Question Four (20 marks)
a)
i)
What is the essential purpose of a financial system

(2 marks)
ii)
Using relevant illustrations, explain what happens to an economy when
financial system becomes inefficient

(8 marks)

b)
Describe the working of money market. Explain five reasons why money market is
important.

(6 marks)

c)
What is meant by international liquidity? Explain the efforts made by International
Monetary fund to solve this problem.

(4 marks)
Page 3 of 3

Bac608: International Money And Banking Question Paper

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