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Hbc2301:Money And Banking Question Paper
Hbc2301:Money And Banking
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2012
QUESTION ONE – (30MARKS)
(a) Define the following terms as used in the study of money and banking. (i) Commodity money (2 Marks) (ii) Intrinsic value. (2 Marks) (iii) Debt investment (2 Marks) (iv) Excess reserves (2 Marks) (b) Explain how each of the following may affect the transactions demand for money in the Baumol Tobin model (i) Brokerage costs (3 Marks) (ii) Interest rates (3 Marks)
(c) The Central Bank is considering open-market operations to increase money supply. Will the money supply increase more if the Central bank buys bonds worth 20,000/= or if it reduces the reserves one bank is required to hold by 20,000/=. If one method creates more, how much more does it create? Justify your answer. (6 Marks) (d) (i) Would a shilling today be worth more to you if the interest rate is 10% or when it is 20%. (2 Marks)
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(ii) Which 1000/= bond has a higher yield to maturity, a 20-year bond selling for 800/= with a current yield of 15% or a 1-year bond selling for 800/= with a current yield of 5%. (4 Marks)
(iii) In the quantity theory of money if output grows and the money supply remains constant, then inflation will become negative. Is this statement TRUE, FALSE or UNCERTAIN ? Justify your answer. (4 Marks)
QUESTION TWO – (20 MARKS)
A consumer receives a fixed income 0 at the beginning of each period. This is intermediated by a bank and unspent bank receive per period interest of . The proportion of cash financed expenditure is (remaining part of expenditure being financed by debit card payments). Every time the individual makes a cash withdrawal, he incurs a brokerage cost and on ATM incompatibility cost (for using an not in hisher bans’ netor. his occurs ith probability (1 ), where is the proportion of ATM terminals that belongs to his/her bank. Total number of cash withdrawals per period equals .
(a) Compute the total cost of using cash for implementing 0 expenditure per period. (5 Marks) (b) What is the optimal number of cash withdrawals? (i.e what is the value of ). (10 Marks) (c) What is the similarity between found above and the Bound-Tobin model? (5 Marks)
QUESTION THREE – (20 MARKS)
(a) Suppose you are the manager of a bank with 100 billion shillings of assets with an average duration of four years and 90 billion shillings of liabilities with an average duration of six years. (i) Conduct a duration analysis for the bank and show what would happen if interest rates rise by 2 percentage points. (10 Marks) (ii) hat actions oul ou tae to reuce the ban’s interest rate ris (4 Marks) (b) What is the change in the market value of assets and liabilities if interest rates rise from 10% to 11%. (6 Marks)
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QUESTION FOUR – (20 MARKS)
(a) Define the following terms as used in the market for loanable funds; (i) Moral Hazard (3 Marks) (ii) Adverse selection (3 Marks) (iii) Asymmetric information (3 Marks) (iv) Principal agent problem (3 Marks) (b) Describe four tools that can be used to solve the principal agent problem. (8 Marks)
QUESTION FIVE – (20 MARKS)
(a) Assume the reserve requirement is 20% and banks hold only the required reserves and there is no cash held by the public. The Central bank decides it wants to expand the money supply by 40,000/= (i) If the Central Bank uses open-market operation will it buy or sell bonds? (4 Marks) (ii) What quantity of bonds does the Central Bank need to buy or sell to accomplish the goal. Explain your answer. (4 Marks) (b) Suppose the reserve requirement is 10% (i) If the Central Bank sells 100,000/= of government bonds, what is the effect on the econom’s reserves an mone suly? (4 Marks) (ii) Now suppose the Central Bank lowers reserve requirements to 5% but banks choose to hold another 5% of deposits as excess reserves. Why might banks do so? What is the overall change in money supply and money multiplier as a result of these actions? (8 Marks)
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