UNIVERSITY EXAMINATIONS

SCHOOL OF BUSINESS
FIN 3102: MONETARY THEORY AND POLICY
ASSIGNMENT I, II & III

ASSIGNMENT I (10 MARKS)

There are major forms of economic policies conducted by governments aimed at realizing
various macroeconomic objectives. As a policy expert, explain the best policy that can be
implemented in case of the following situations:
i. Balance of payment surplus
ii. The boom period
iii. Increased exchange rate assuming the exchange rate is defined in terms of Kenya
shillings per dollar
iv. Migration of foreign investors from Kenya to other countries
v. High level of unemployment
ASSIGNMENT II (10 MARKS)
a) Graphically explain the effect of a restrictive monetary policy on the aggregate demand-
aggregate supply model
b) Discuss the concept “credit creation”. Given that the cash reserves ratio is 25 percent.
Demonstrate how a commercial bank uses initial deposit of 120,000 shillings to create credit.
Also calculate the maximum primary deposits that can be created, maximum cash reserves to
be created and maximum secondary deposits to be created.

ASSIGNMENT III (20 MARKS)

a) Explain the similarities between the Fishers transactions approach and the Cambridge cash
balances approach to quantity theory of money
b) Consider the Tobin’s Theory of Speculative Demand for Money.Illustrate and explain Tobin’s
method of deriving the demand function for speculative money and demonstrate the substitution
effect and the wealth effect
c) Suppose a person wishes to spend $10,000 in a year. His hourly wage is $40 per hour and he
spends half an hour on each of his visits to the bank. The nominal interest rate on his savings
account at the bank is 10%.
i) How often should he go to the bank?
ii) On average, how much money should he carry on him?
iii) Find the total cost at the optimum cash holding level.