MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATIONS
2016/2017 ACADEMIC YEAR
FOURTH YEAR SECOND SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF ARTS IN ECONOMICS
COURSE CODE: ECO 415
COURSE TITLE: INTERNATIONAL ECONOMICS II
DATE: 12TH MAY 2017 TIME: 11:00 – 13:00HRS
INSTRUCTIONS TO CANDIDATES
Answer Question ONE and any other THREE questions
This paper consists of TWO printed pages. Please turn over.
QUESTION ONE
A) Kenya has never recorded a positive balance of trade since independence in 1963, explain why this is the case and how it has managed to fulfill its international trade obligations (8marks)
B) Explain the THREE main functions of the spot Market for foreign exchange (6marks)
C) Discuss the development of money as a medium of exchange (6marks)
D) Explain the role of demand for and supply of precious metals (specie) in determining the price of money ( 5marks)
QUESTION TWO
A) International trade can be distinguished from domestic trade by two basic characteristics. Explain these characteristics (5marks)
B) Discuss the role of exchange rate in determining nature and direction of international trade (5marks)
C) Explain the law of one price (5marks)
QUESTION THREE
a) Explain the participants in the Foreign Exchange market (5marks)
b) Discuss the functions of Foreign Exchange Market (6marks)
c) Explain the difference between hedging and speculating (4marks)
QUESTION FOUR
A) Explain the link between foreign exchange markets and financial markets (7marks)
B) Whenever covered interest parity does not hold, there are opportunities of making riskless profit through interest arbitrage. Discuss (8marks)
QUESTION FIVE
a) Explain how a government can maintain exchange rate outside equilibrium levels under fixed exchange. (7marks)
b) Use the supply and demand model of the foreign exchange market to analyse the effects of a rise in the price level of the USA relative to that of Kenya under a flexible exchange rate regime (8marks)
