a)
Which definition of money supply, M1 or M2, is most appropriate if most important
function of money is its role as medium of exchange? Give reasons for your answer

(4 marks)
b)
When interest rates rise there is a tendency for people to switch their money out of
demand deposits and other chequable deposits into money market deposit accounts
and money market mutual funds.
Required

Explain clearly how this affects the following and implication on the level of
aggregate demand

i)
Money supply as define by M1

(5 marks)

ii)
Money supply as defined by M2

(5 marks)

c)
Suppose a country like Tanzania were to adopt Kenya shilling as its own currency,
explain how the ksh money supply would be affected.

(6 marks)

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