Question 1
a) Explain the following concepts
i. Legal tender
ii. Certificate of deposit
iii. Inflation targeting
iv. Excess reserves
v. Yield curve (15 marks)
b) Highlight the key assumptions on each of the 3 theories of the term structure of interest rates. (9 marks)
c) Show that M = mXMB, where m is the money multiplier and MB the monetary base.

Question 2
a) Using a well labeled graph show that supply shocks by themselves (without government intervention) cannot be the source of high inflation. (10 marks)
b) Can fiscal policy by itself produce inflation? Use a graph to demonstrate the effect of a one-shot permanent increase in government expenditure. (10 marks)

Question 3
a) Briefly explain the following concepts: (9 marks)
i. Absolute purchasing power parity
ii. Relative purchasing power parity
iii. Interest rate parity theory
b) What are the effects of international fisher effect? (6 marks)
c) Using a well labeled graph, show the response of exchange rate to an increase in foreign interest rate. (5 marks)

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