MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

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University Examinations 2019/2020

THIRD YEAR, SECOND SEMESTER EXAMINATION FOR THE DEGREE OF

BACHELOR OF ECONOMICS AND BACHELOR OF COOPERATIVE MANAGEMENT

BEC 3357 – MONETARY THEORY & PRACTICE

DATE: OCTOBER 2020 TIME: 2 HOURS

INSTRUCTIONS: Answer question oe and any other two questions.

QUESTION ONE (30 MARKS)

a) Briefly explain the following monetary theories:

(i) Classical theory (2 Marks)
(ii) Rational expectations theory (2 Marks)
b) (i) Clearly explain what economists mean by “money” (2 Marks)
(ii) State and comment on the functions that money performs in an economy.(6 Marks)
(iii) Explain what money consists of in most countries today. (4 Marks)
c) (i) Explain how banks create money. (6 Marks)
(ii) Outline the four economic functions of banks and explain every function (8 Marks)

QUESTION TWO (20 MARKS)

a) Explain the banking system in Kenya , highlighting the groups of institutions involved in
its performance. (10 Marks)
b) State the four types of assets a bank usually owns and provide a summary of each.
(10 Marks)

QUESTION THREE (20 MARKS)

a) (i) Explain monetary policy. (2 Marks)

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 (ii) State the principal aim of monetary policy and the role of the Central Bank of Kenya
in maintaining economic stability. (6 Marks)
b) (i) Explain the factors that influence the quantity of money that people choose to
hold. (8 Marks)
(ii) Explain the following monetary policy transmission mechanisms;
• The Keynesian Version (2 Marks)
• The monetarist version (2 Marks)

QUESTION FOUR (20 MARKS)

a) Explain the role of the Central Bank of Kenya as monetary authority. (6 Marks)
b) (i) Using a suitable graphic illustration, explain the demand for money curve(5 Marks)
(ii) State the factors that limit the quantity of deposits that banks can create.(9 Marks)

QUESTION FIVE (20 MARKS)

a) State the main measures of money and specify the elements of each. (10 Marks)
b) (i) Explain what a bank does in order to achieve security for its depositors.(2 Marks)
(ii) Explain each of the safeguard measures the bank employs in (i) above.(8 Marks)

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