2005_EC3332-1 - EC3332 NATIONAL UNIVERSITY OF SINGAPORE EC3332 MONEY AND BANKING I(SEMESTER II AY2005—2006 Time Allowed 2 Hours IN TRUCTIONS TO

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Unformatted text preview: EC3332 NATIONAL UNIVERSITY OF SINGAPORE EC3332 MONEY AND BANKING I (SEMESTER II : AY2005—2006) Time Allowed : 2 Hours IN TRUCTIONS TO CANDIDATES 1. This examination paper contains FIVE (5) questions and comprises FOUR (4) printed pages. 2. Answer THREE (3) questions. QUESTION 1 IS COMPULSORY. Answer any TWO (2) questions from the remaining FOUR (4) questions. The total mark for this paper is 60. 3. This is a CLOSED BOOK examination. 2 EC3332 QUESTION 1 IS COMPULSORY Answer THREE questions. 1 (a) According to the New Classical economists, there is no role for activist policy in the economy. However, the New Keynesians advocate an activist role. Discuss the reasons for the differences in their policy prescriptions. Explain with appropriate diagrams. (12 marks) (b) While economists agree that an increase in government budget deficits increases the demand for Ioanable funds, some argue that larger deficits do not significantly raise interest rates. How can this be possible? Explain. (8 marks) 2 (a) Justify the following statements as True, False or Uncertain. (i) Monetary authorities must target the interest rate rather than the money supply if there are external shocks on domestic investments. (6 marks) (ii) Demand pull inflation can also occur with rational expectations. (6 marks) (b) In developing countries that do not have active markets for short term financial instruments, savers tend to allocate more of their savings to bank deposits than do savers in countries with more active financial markets. Discuss. (8 marks) 3 (a) Discuss two basic differences between Friedman's Quantity Theory of Money and Keynes' Liquidity Preference Theory. Are there any similarities between the two theories? (6 marks) (b) During the last one and a half decades, there has been extensive and still ongoing financial reform in many countries. Discuss the factors behind this. (14 marks) 3 EC3332 4 (a) Justify the following statements as True, False or Uncertain. (i) Overshooting of the exchange rate only occurs in a Neo- Keynesian model; (5 ma rks) (ii) During a banking crisis the changes in the C/D (currency to deposit) ratio will decrease the money supply. (5 marks) (b) Suppose the yield curve is perfectly flat and the economy is operating at full employment. The Head of State unexpectedly announces the country's involvement in a major foreign war. Use the Expectations Theory of the term structure of interest rates to answer the following: (i) As a personal investor with $100,000 to invest in government securities, how would you allocate your funds between short and long term securities? (5 marks) (ii) What would happen to the slope of the yield curve after the market digests the information? (5 marks) 5 (a) Use the asset market approach to analyze the effects of each of the following events on the exchange rate between country A (domestic country) and country B. (i) A large increase in the amount of non-performing loans among banks in country A, leading to a bank panic. (4 marks) (ii) An increased use of credit cards in country A. (4 marks) (iii) Increase in expected inflation in country B will lead to an appreciation of the exchange rate. Do you agree? (6 marks) 4 EC3332 (b) A banking system with deposit insurance needs more supervision from third—party examiners than does a banking system without guarantees for depositors. Do you agree? Explain why or why not. (6 marks) ----- END OF PAPER ---—- ...
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This note was uploaded on 02/01/2012 for the course ECON 101 taught by Professor Meonk during the Spring '11 term at Abu Dhabi University.

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2005_EC3332-1 - EC3332 NATIONAL UNIVERSITY OF SINGAPORE EC3332 MONEY AND BANKING I(SEMESTER II AY2005—2006 Time Allowed 2 Hours IN TRUCTIONS TO

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