Unique Paper Code : 12275303_OC

Name of the Paper : Money and Banking

Name of the Course : B.A. (Hons) Economics-CBCS-Generic Elective

Semester : III

Duration: 2 Hours Maximum Marks: 75

Instructions for Candidates

1. Write your Roll No. on the top immediately on receipt of this question paper.
2. Answer any four questions.
3. All questions carry equal marks.
4. Answer may be written either in English or Hindi; but the same medium should be used throughout
the paper.

1. (a) The required reverse ratio is 12 percent. The desired currency to deposit ratio and the desired excess
reserve ratio are both zero. If there is an open market purchase of Rs. 100, 000/-, what will happen to the total
deposits of the banking system? To the total loans? To the total reserves?
(b) What factors might lead to a change in the public’s desired currency to deposit ratio?
2. (a) “Honest borrowers pay a higher interest rate to compensate for the fact that dishonest borrowers default
most of the time. Honest borrowers thus subsidize dishonest borrowers.” Using suitable diagram explain the
statement.
(b) Given the following information about future contract for asset PQR:
Lot size: 500 Units
Future Price: Rs. 100 per unit
Initial Margin: Rs. 7 per unit
Maintenance Margin: Rs. 4 per unit
The settlement prices at the end of several trading days after the transaction was entered into are as follows:

Trading Day Settlement Price (in Rs.)

1 99
2 97
3 98
4 95

Calculate and explain the variation margin required by an investor who buys future contracts at different days
mentioned above.

3. (a) According to the preferred habitat hypothesis, if the market expects future one year interest rates to be the
same as today’s one year interest rate, will the term structure of interest rates be increasing, decreasing or flat?
Why?
(b) The interest rate on a one year government bond is 4 percent, the rate on a two year bond is 7 percent, and
the rate on a three year government bond is 9 percent.
(i) Use the expectations hypothesis to determine the market’s forecast of the one year rate next year.
(ii) Describe the shape of the yield curve.
(iii) What is the market’s forecast of the one year rate in two years?
4. (a) Define the macro prudential norms in Basel – III and explain their implications on Indian bank’s
profitability.
(b) Discuss the deregulation of savings bank deposit interest rate.
5. (a) Can the central bank choose money aggregate as an intermediate target? Explain the points in favour of
and against the money aggregate as intermediate target?
(b) Explain the lags in monetary policy.
6. Write short notes on any three of the following topics:
(a) Main and sub- objectives of financial reforms introduced in 1991.
(b) Economic role of the option markets.
(c) Commercial Papers Market.
(d) Weighted Monetary Aggregates.