QUESTION $2$: $[15$ marks$]$

For each of the following indicate whether the statements are TRUE, PALSE, or

UNCERTAIN and explain briefly.

$[3$ marls each$]$

a$)$ The nominal interest rate equals the sum of the real rate plus the expected

rate of inflation.

b$)$ Deflation is the decrease in inflation.

c$)$ Banks never hold excess reserves because if they did, they would forego

earning interest on those funds.

d$)$ Currency in circulation is the assets of the central bank of every country.

e$)$ According to the Keynesians, the velocity of money is highly volatile and

unpredictable.

SECTION B: ANSWER ANY TWO $(2)$ QUESTIONS. ALL QUESTIONS CARRY

EQUAL MARKS.

QUESTION $3$: $[15$ Marks$]$

"Money is a necessary evil." Discuss.

QUESTION $4$: $[15$ marks$]$

It is not particularly accurate to think of the Central Bank as having a complete control

over the supply of money. Do you agree with this statement? Discuss.

QQUESTION $5$: $[15$ marks$]$

The B$$umol$-$Tobin Inventory$-$theoretical approach to money demand is satisfactory only

to the extent of certainty with the timing of transactions. Present and discuss a model that

incorporates uncertainty with the timing of transactions and compare it with the model of

certainty.

QUESTION $6$: $[15$ marks$]$

Using both the supply and demand for bonds and liquidity preference frameworks, answer

the following.

a$)$ Show how interest rates are affected when the riskiness of bonds rises. Are the

results the same in the two frameworks?

$[8$ marks$]$

b$)$ Show why interest rates are procyclical $($rising when the economy is expanding and

falling during recessions$).$