Question 1
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)

Question 2
a) Using a graph illustrate and explain interest rate targeting. (10 marks)
b) Why is price stability the primary focus of CBK? (5 marks)
c) Between hierarchical and dual mandate, which is better and why? (5 marks)

Question 3
a) How should CBK respond to an asset-price bubble? (5 marks)
b) Individuals are affected by monetary policy change in several ways. Which are the 3 direct effects? (9 marks)
c) Using a graph, show the response of aggregate output and interest rate to an expansionary fiscal policy. (6 marks)

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