Given that the minimum reserve requirement ratio of a nation equals 15% and the public desires to hold 25% of their wealth in money form, determine how much will be created by commercial banks system from an initial money deposit of 850 million shillings? Out of these money created, how much of it will be in cheques form?
a) (i) What do you understand by Central Bank’s bank rate? (4 marks)
(ii) Explain how the Central Bank uses its bank rate to influence the economic growth of a country. (6 marks)
(b) What do you understand by a liquidity trap? Illustrate and explain how an increase in money supply through a purchase in open market operations affects the rate of interest.
(c) What are the advantages of using money in any exchange over the barter system of trade? (10 marks)
Write short explanatory notes on the following concepts:-
(i) Fiat money (5 marks)
(ii) Velocity of money (5 marks)
(iii) Minimum reserve requirement (5 marks)
(iv) Gresham’s Law (5 marks)
(a) Using the monetarists theory of money, show and explain how a change in money supply causes inflation. (10 marks)
(b) What role do non-financial institutions play in economic development? (10 marks)
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