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BM/OCT 2007/ECO551/553

CONFIDENTIAL

UNIVERSITI TEKNOLOGI MARA
FINAL EXAMINATION

COURSE

:

MONETARY ECONOMICS

COURSE CODE

:

ECO551/553

EXAMINATION

:

OCTOBER 2007

TIME

:

3 HOURS

INSTRUCTIONS TO CANDIDATES
1.

This question paper consists of six (6) questions.

2.

Answer only five (5) 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)
ii)

the Question Paper
an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO
This examination paper consists of 4 printed pages
© Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

2

BM/OCT 2007/ECO551/553

QUESTION 1
a)

The age of electronic money is upon us.
Describe electronic money and
provide three (3) advantages and three (3) disadvantages of electronic money. (10 marks)

b)

Could each of the following items potentially serve as money? Discuss. i)
ii)
iii)

Visa credit card.
Ringgit Malaysia note.
Debit card.
(10 marks)

QUESTION 2
a)

What is the distinction between "direct finance" and "indirect finance"? Explain why it might be important for an economy to have both types of financing? (15 marks)

b)

Why are financial assets important to an economy? What role do they play? (5 marks)

QUESTION 3
a)

Using the Loanable Funds Theory, explain the effects on the rate of interest as a result of the following changes.
i)

The central bank decreases the money supply by selling bonds to the public. (7 marks)

ii)

People are optimistic about future economic growth.
(8 marks)

b)

If you expect inflation to increase further between 2006 and 2007, what do you think would happen to interest rates in the future? How does expected inflation affect the shape of the yield curve?
(5 marks)

© Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

3

BM/OCT 2007/ECO551/553

QUESTION 4
a)

In the context of the IS-LM model, illustrate the effects on the equilibrium level of income and the rate of interest as a result of each of the following situations. i.

an increase in the volatility of bond returns.

ii.

a reduction in the rate of income tax.

iii.

a reduction in the level of government spending.

(3 marks)
(3 marks)

iv.

b)

(3 marks)
an additional open-market purchases of government securities by Bank Negara Malaysia.
(3 marks)

Explain the following statement:
"The less interest-sensitive money demand is, the more effective monetary policy is relative to fiscal policy".
Support your answer with relevant diagrams of the IS-LM model. (8 marks)

QUESTION 5
a)

Explain any four (4) factors that determine money demand in Friedman's Modern Quantity Theory of Money.
(12 marks)

b)

Graphically explain the concept of liquidity trap.
(4 marks)

c)

Briefly differentiate between Fisher's Equation of Exchange and the Cambridge Equation of Exchange.
(4 marks)

© Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

4

BM/OCT 2007/ECO551/553

QUESTION 6

Based on the article below answer the questions that follow. "The latest estimates for Malaysia show that potential output grew at 6.3% in 2006, with the output gap estimated at an average of positive 0.4% of potential output. With the continuous improvement in productivity and expansion of both capital stock and labor force during the year, the output gap narrowed and closed towards the second half of 2006, resulting in the Malaysian economy growing close to its potential level at the end of the year."

(Adapted from BNM Annual Report 2006, p. 114)

(a)

Identify and explain briefly the type of monetary policy that was implemented by the government in the above article.
(4 marks)

(b)...
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