a$)$ QUESTION ONE

b$)$ Derive the complex money multiplier formula.

b$)$ Suppose that the central bank buys bonds from the public worth Sh$100$ billion. The public, on

the other hand, deposits the central bank's cheques with banks and withdraws Sh$40$ billion as

currency holding and leaves Sh$60$ billion in banks as demand deposit. Suppose that the banks are

required to maintain total cash reserves of $15\%($including $10\%$ as statutory reserve requirement

and $5\%$ as excess reserve$)$ of their deposits.

Required:$-$

i$)$ Calculate simple money multiplier.

ii$)$ Compute complex money multiplier.

iii$)$ The additional high powered money of $100$ billion will increase total money supply

in the economy by how much?

iv$)$ How much money will be in cash and in cheques?

QUESTION TWO

a$)$Why does an increase in the interest rate cause a decline in the bond price? What is its effect on

the demand for money?

b$)$ During World War II$,$ both Germany and England had plans for a paper weapon: they each

printed the other's currency, with the intention of dropping large quantities by airplane. Why

might this have been an effective weapon?