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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 2011/2012
THIRD YEAR FIRST SEMESTER EXAMINATION FOR THE DEGREE BACHELOR OF COMMERCE
HBC 2222: MONETARY THEORY AND PRACTICE
DATE: 16TH AUGUST 2012 TIME: 8.30 AM – 10.30AM
INSTRUCTIONS
Answer QUESTION ONE and ANY OTHER TWO questions. QUESTION ONE a) i. Define money and explain eight desirable qualities of „good? money (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. Explain 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) 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)
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)
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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)
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)

Hbc 2222: Monetary Theory And Practice Question Paper

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