QUESTION ONE –COMPULSORY a) i. Discuss the main disadvantages of an economy in which incomes are paid in kind and transactions are carried out by barter. (5 marks) ii. Define “money supply” and indicate the meaning of M3 as used today. (2 marks) b) i. Distinguish between nominal and real interest rate and indicate their importance. (2 marks) ii. How do interest rates influence the economic decisions of individuals, businesses and governments in a country? (3 marks) c) i. Explain the historical development of money and the problems encountered at each stage of its development. (6 marks) ii. Explain the sense in which commercial banks are said to create money and what sets the limit to the amount that they can create. (5 marks) d) i. Explain the Cambridge version of the quantity theory of money and indicate its importance. (5 marks) ii. In an economy 100 transactions with a market value of Shs 600 were undertaken. The money supply was only Shs 200. Explain how this was possible. (2 marks) (Total 30 marks)
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