Question 1:
(a) Illustrate clearly how the interest rate is determined in:
(i) Loan able Funds Framework; and
(ii) Liquidity Preference Framework.
(b) According to Liquidity preference analysis a raise in money supply always leads to a fall in the rate of interest. Illustrate using diagrams, how an increase in money supply leads to a fall in the interest rate.
(c) Critically measure the statement in part (b).
Question 2:
(a) Using instances explain and discuss how the theory of Purchasing Power Parity conforms to the Law of One Price.
(b) According to you, how best does the Theory of Purchasing Power Parity illustrate exchange rates?
(c) What are the factors affecting exchange rates in long run?
Question 3:
The main dissimilarity between Federal Reserve System and other government agencies in the United States is its independence.
Explain and discuss clearly why the Central Bank is expected to be more independent.
Question 4:
(a) Illustrate the meaning of the term inflation.
(b) “Inflation is always and everywhere a monetary phenomenon.” Discuss this statement with aid of instances.
(c) In brief illustrate the link between budget deficits and inflation.
Question 5:
Evaluate the monetary policy tools that the Central Bank can employed to manipulate the money supply and measure the effectiveness of each of the policies.