The University of Zambia

in association with

ZCAS University

BEF411 MONETARY ECONOMICS

MOCK EXAMINATION

MAY 2020

TIME ALLOWED: READING AND WRITING – THREE HOURS

UPLOADING ANSWER SCRIPT – 30 MINUTES

INSTRUCTIONS:

1. Section A: this question is compulsory and must be attempted.

2. Sections B: Answer TWO (2) questions from this section.

3. This examination paper carries a total of 80 marks.

1
SECTION A: Question 1 is compulsory and must be attempted

Question 1
Somasoma is an island nation in the South East Asia in the Pacific Ocean south east of the
Philippines Islands. Somasoma was a Germany colony until 1st November 1960 when
Somasoma became an independent nation. Somasoma’s major exports are palm oil, and
seashells. These exports are mainly destined to Australia and China. In the last five years
Somasoma’s economy has performed poorly recording annual average real GDP growth of 1.3
percent against a population growth rate of 5%.

Required
a) What policy measures would you recommend to the Government of Somasoma?
(15 marks)
b) Explain the impact of the measures recommended in ( a ) above (25 marks)

(Total: 40 marks)

SECTION B: Attempt any TWO questions in this section

Question 2
It is sometimes argued that regulation of the banking system (by minimum reserve
requirements, for example) acts like a tax on banks, and leads to the growth of non-bank
financial intermediation, which escapes the regulation. Therefore, it is argued that bank
regulation is self-defeating and undesirable. Discuss in the context of the Zambian banking
system. (20 marks)

Question 3

a) Prove that in a competitive equilibrium iD = iL = i (10 marks)

Where:
iD = Deposit interest rate
iL = Loan interest rate
i = Market interest rate
b) Given interest rate rule of the form: Rt = πt + g(yt – y*) + h(πt – π*) + r*
If inflation was equal to the desired/target rate of inflation and output deviations were
zero (yt – y*), to what does the equation collapse? (10 marks)
(Total 20 marks)

2
Question 4
Assume that Bank of Zambia (BOZ) policy makers are “WET”, with the aid of Figure 4.1
below explain how these BOZ policy makers would implement an expansionary monetary
policy.

Figure 4.1: Time inconsistency and inflation bias

(20 marks)

END OF MOCK EXAMINATION