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 421
COURSE TITLE: MONETARY THEORY AND POLICY
DATE: 10TH 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) In the Baumol Transaction Demand for money model, money demand is determined by a number of factors. Mercy earns KES 50,000 per month and can invest the money in interest earning ventures at 5% per year.
i. What must be the per-transaction be to ensure that her average holdings are KES 10,000 per month? (5mks)
ii. Assume her income changes to KES 60,000, the interest on saving moves to 4.5%, and the per-transaction cost moves to KES 3.12. What will be her new optimal money holding? (4mks)
iii. Comment on the relationship between the per-transaction cost and the demand for money holding by Mercy. (1mk)
b) With the aid of a well-labelled diagram, explain the concept of liquidity trap. (5mks)
c) In the context of your country using suitable examples, discuss the functions of Non-Bank Financial Institutions(NBFI’s). (10mks)
QUESTION TWO
a) In the Kenyan context, explain the roles that the money market plays in the economy. (7mks)
b) Compare and contrast bank and Non-Bank Financial Institutions. (8mks)
QUESTION THREE
a) Explain the key objectives of monetary policy in a country. (7mks)
b) Discuss the tools that the Central Bank of Kenya would use to effect its monetary policy functions. (8mks)
QUESTION FOUR
a) Discuss the Cambridge cash balance approach to demand for money. What are the key criticisms to this approach? (8mks)
b) Explain the Keynesian approach to money demand. (7mks)
QUESTION FIVE
a) Discuss the pros and cons of the barter system of trade. (6mks)
b) If the required reserve ratio ratio is ten percent, the currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion. Calculate the money supply, monetary base and money the money multiplier. (6mks)
c) Explain any three properties that a commodity must possess to be used as money. (3 mks)
