CONFIDENTIAL BA/FEB 2023/ECO531

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UNIVERSITI TEKNOLOGI MARA
FINAL EXAMINATION

COURSE MONETARY THEORY AND POLICY

COURSE CODE EC0531
EXAMINATION FEBRUARY 2023
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 3 printed pages
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CONFIDENTIAL 2 BA/FEB 2023/ECO531

QUESTION 1

a) Does money cause inflation? How does money reflect the business cycle?
(5 marks)

b) With examples explain direct finance and indirect finance. Discuss two (2) advantages of
the financial system.
(10 marks)

c) Digital wallet is getting more acceptance in the payment system throughout the world.
Discuss.
(5 marks)

QUESTION 2

a) Differentiate between the transaction and liquidity approach in defining money.

(5 marks)

b) Discuss two (2) factors that influence demand for assets.

(5 marks)

c) Using the bond market framework, explain the effect on the level of interest rate when;

i. Malaysian Treasury issues bond to the public.

ii. Consumers become more pessimistic about the future health of our economy.

(10 marks)

QUESTION 3

a) Show how the money market is affected if inflation continues to rise using the Liquidity
Preference Framework.
(5 marks)

b) Identify two (2) factors that determine the risk structure of interest rates.
(5 marks)

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CONFIDENTIAL 3 BA/FEB 2023/ECO531

c) rn = (r^r2r3-rn)/n

The equation states that the n-period interest rates equal the average of the one-period
interest rates expected to occur over the n-period life of the bond.

Explain the Pure Expectation Theory. Differentiate between the Pure Expectation Theory
and Segmented market theory.
(10 marks)

QUESTION 4
a) The central bank is the agency responsible for promoting monetary stability and credit
situation. Describe two (2) objectives of monetary policy.
(5 marks)

b) When Malaysia experiences an economic downturn caused by COVID-19 in 2020, the

Bank Negara Malaysia (BNM) used monetary policy to rectify the problem. Explain the
type of monetary policy and the three (3) main policy tools that might have been
undertaken to rectify this problem.
(10 marks)

c) According to Keynesian Theories of Money Demand, explain two (2) reasons behind the
demand for money.
(5 marks)

QUESTION 5
a) The expected inflation is significant to study the demand for money, especially during post
COVID-19 crisis. Explain the effect of higher expected inflation on the demand for real
money based on Friedman's modern quantity theory of money.
(5 marks)

b) Using the IS-LM model, illustrate the effect on the equilibrium interest rate and output if
there is an increase in public health spending on RT-PCR screening and vaccines.
(5 marks)

c) Using the IS-LM model, explain why Monetarists believe that monetary policy is relatively
effective while Keynesians view this policy as relatively ineffective.

(10 marks)

END OF QUESTION PAPER

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