QUESTION ONE –
a) Define money and explain its major functions in a modern economy. (5 marks)
b) (i) Define real interest rate indicating its components and importance. (2 marks)
(ii) Explain briefly how interest rates might influence the economic decisions of
individuals, businesses and governments. (6 marks)
c) (i) Define monetary policy and explain four instruments used by the central bank in
its execution. (8 marks)
(ii) What factors might contribute to the lack of effectiveness of monetary policy in a
developing country (4 marks)
d) Explain Fisher’s quantity theory of money clearly indicating its assumptions and
importance in an economy under the monetarist assumptions. (5 marks)
(Total 30 marks)
QUESTION TWO
a) Distinguish between demand-pull and cost-push inflation clearly indicating their
causes and the reasons for making this distinction. (12 marks)
b) What are the adverse and positive effects of inflation? (8 marks)
(Total 20 marks)
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QUESTION THREE
a) With the aid of diagrams explain the Keynesian liquidity preference theory clearly
indicating the motives for holding money and the factors that influence the various
demands for money. (14 marks)
b) What are the main criticisms of the Keynesian liquidity preference theory of interest?
(6 marks)
(Total 20 marks)
QUESTION FOUR
The theories of interest rates suggest that there is one single interest rate in an economy, yet there exists a whole range of interest rates in an economy at any one time.
(i) Explain four different theories of interest rate determination. (12 marks)
(ii) How do you account for the existence of several interest rates in an economy at the
same time? (8 marks)
(Total 20 marks)
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