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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

1
DEDAN KIMATHI UNIVERSITY OF TECHNOLOGY
UNIVERSITY EXAMINATION ACADEMIC YEAR 2012/2013
THIRD YEAR FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
HBC 2222: MONETARY THEORY AND PRACTICE
APRIL 2013 TIME: 2 HOURS
Instructions:
Answer question ONE and any other TWO questions
QUESTION ONE – COMPULSORY
a) i. Define money and indicate eight desirable properties of ‘good’ money,
giving reasons. (5 marks)
ii. Explain the advantages of money over barter in a modern economy (5 marks)
b) i. Distinguish between fiscal and monetary policies and indicate which
is likely to be more effective in promoting economic stabilization in
a developing country, giving reasons. (6 marks)
ii. Provide four reasons for the existence of several interest rates in an economy
at the same time. (4 marks)
c) i. Explain Irving Fisher’s version of the quantity theory of money and indicate
its importance in economics. (7 marks)
ii. In an economy 50 transactions with a market value of shs 400 were undertaken.
The money supply was shs 100 only. Explain how this was possible.
(3 marks)
(Total 30 marks)
QUESTION TWO
a) Distinguish between demand-pull and cost-push inflation clearly indicating their
causes and provide the reasons for making that distinction. (12 marks)
b) “Inflation has serious adverse economic effects and is never desirable in an
economy”. Discuss this statement indicating clearly the adverse and beneficial
effects, if any, of inflation. (8 marks)
(Total 20 marks)
QUESTION THREE
a) Distinguish between nominal and real interest rates and indicate their importance
in finance. (4 marks)
b) With the aid of diagrams distinguish between the loanable funds theory and the
Keynesian liquidity preference theory of interest rates and indicate their criticisms.
(16 marks)
(Total 20 marks)
2
QUESTION FOUR
a) Using AD-AS analysis explain how the moderate advocates of Keynesian and
monetarist views explain the determination of real output and the price level in
an economy following an increase in the aggregate demand through an increase
in the money supply or government spending. (8 marks)
b) The main differences between Keynesian and monetarist economics rest on the
effect of the money supply (M) on output (Y) and on the role of
demand-management policies. Discuss. (12 marks)
(Total 20 marks)
QUESTION FIVE
You are given the following information about the commodity and money markets for a closed economy
without the government:
Commodity market
C = 100 + 0.7Y
I = 200 - 21r
Where C = consumption, I = investment, Y = income and r = interest rate
Money market
MDT = 0.5Y
MDS = 100 – 2r
MS = 500
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 IS and LM functions for this economy. (4 marks)
iii) Find the equilibrium income and 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 the money
supply is increased by 20 and comment on your results. (4 marks)
(Total 20 marks)

Hbc 2222: Monetary Theory And Practice Question Paper

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