Topics: Monetary policy, Central bank, Inflation Pages: 1 (295 words) Published: October 19, 2013
(a) Explain how an individual can supply loanable funds for investment through financial markets and financial intermediaries. (b) Assume a closed economy where Y=C+I+G. where Y is national income, C is consumption, I is investment and G is government expenditure. If income (Y) = k8million, taxes=k1.5 million, private saving=k0.5 million, and public saving=k0.2 million (i) Define what national savings, private savings and public savings are. (ii) Calculate consumption, government spending, national savings and investment. (c) Define what government budget deficit is. Using a clearly labeled diagram, show and explain how government budget deficit crowds out private investment. (d) Explain how savings and investment are important in fostering economic growth. QUESTION TWO

(a) If the central bank wants to increase money supply using open market operations, explain what it should do. (b) Explain the effect of an increase in the discount rate by the central bank on the amount of reserves banks hold, the money multiplier and ultimately the money stock in the economy. (c) Suppose k500 is deposited in the bank. And banks have a 10% reserve ratio. (i) Define what reserve ratio is. Define and calculate the money multiplier. (ii) Calculate how much money will be created by the banking system from the k500. (iii) Assuming a reserve ratio of 5%, and 20%, Calculate the money multiplier and money created using each reserve ratio. Use your calculations to explain how the money multiplier and money created changes when the reserve ratio is increased& reduced. (d) Using a clearly and well labeled diagram, show and explain the effect of an increase in money supply on the inflation rate of the economy. QUESTION 3 Explain how fiscal policy and monetary policy can be used to get an economy out of recession.
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