FEEDBACK TUTORIAL LETTER

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1 FEEDBACK TUTORIAL LETTER 1 st SEMESTER 2017 ASSIGNMENT 1 MONEY AND BANKING MAB611S 1

2 1. USEFUL INFORMATION FOR WRITING ASSIGNMENTS Below are valuable information for improving upon the quality of your next Distance Learning assignments: Be logical in your reasoning Avoid the use of I. Rather make use of We. Avoid plagiarising the work of others You are allowed to refer to other sources such as the internet but refrain from copying and pasting the answers you get from there. The idea is that you learn and are able to present your understanding of the underlying concepts. Therefore copying and pasting from various internet sources will not really help in your learning. Communicate in a simple and flowing language. Carefully paragraph your presentation. Ensure a logical flow when discussing your answers. Ensure consistency with regards to the numbering and sequencing. Always check for spellings and grammatical errors. Do extensive reading before writing your assignment The beauty of economics lies in the use of diagrams and appropriate mathematical models. Make use of these tools, whenever the need arise. Avoid duplicating your friend s work. You are however encouraged to discuss your assignment in groups. Address specifically the questions raised. Make use of Time Management principles in approaching your assignment questions. Do not introduce irrelevant materials into your discussion. Always be sure that the demands of a question are clear to you before proceeding with your discussion. The total marks awarded should guide you on how long your answer should be. More emphasis should be placed on multiple choice questions as they are not as easy as students may think. 1.2 ASSIGNMENT QUESTIONS Instructions All questions are compulsory. In deciding how much detail to provide and how much time to spend on each question, it is imperative that you use the mark allocation as a guide. Clarify all your statements, workings and assumptions. Use diagrams wherever appropriate. Diagrams must be clearly illustrated. 2

3 ASSIGNMENTS Semester 1: 2017 Academic Session Course Code: MAB611S Course Name: Money and Banking ASSIGNMENT 1 QUESTION 1: MULTIPLE CHOICES [ 2x20=40 MARKS] 1) B. to serve as a unit of account 2) C. can be converted into a means of payment easily without loss of value. 3) B. print money 4) A. monetary policy. 5) C. required reserve ratio. 6) D. lending its excess reserves 7) B. earn a profit. 8) D. the interest rate. 9) B. leads to an upward movement along the demand for money curve. 10) D. cannot be determined from the information given. 11) B. $27 million 12) A. assets; liabilities 13) C. asymmetric information. 14) C. monetary base; monetary base; money multiplier 15) D. Buying securities, which then become their assets. 16) A. Matching up buyers and sellers of existing securities. 17) E. None of the above. 18) E. None of the above. 19) C. $ ) A. P = F (1+i) n 3

4 QUESTION 2 [40 MARKS] 1. This question relates to the concepts of inflation and deflation: (a) Explain why both inflation and deflation are problematic. High inflation leads to hyperinflation if it continues on an upward trend and it also leads to lower aggregate demand which in turn leads to firms reducing their supply of goods and services. GDP falls, firms retrench workers, unemployment increases, poverty levels rise etc. Deflation is also problematic because it is a continuous decrease in the average price levels. If prices continue on a downward trend prices and profits eventually reach uneconomic levels or zero. If prices become uneconomic firms downsize, GDP falls, (b) unemployment increases, poverty levels rise etc. [10 marks] State and explain the policies that need to be taken to prevent the economy from experiencing a hyperinflationary situation. Students are supposed to state and explain the following measures as ways arresting inflation in an economy on a hyperinflationary trend: Increase taxes Reduce government spending Increase interest rates Reduce money supply [16 marks] of 2. Given the following information for a large economy: Required reserve ratio = 0.10 Currency in circulation = 400 Mill Checkable Deposits = 800 Mill Excess reserves = 0.8 Mill Time and saving deposits = 300Mill MMF = 400 Mill (a) (b) Calculate M1 money multiplier. m 1 = 1+c = = 1.5 = 2.5 [7 marks] r+e+c Calculate the M2 money multiplier. m 2 = 1+c+t+mm = = = 3.95 [7 marks] r+e+c QUESTION 3 [20 MARKS] 1. If a bank experiences high deposit outflows to the extent that all its reserves are completely wiped out, what action should the managers of the bank take to raise the necessary reserves and elaborate as to how it would be used to arrest the situation (with proper examples and scenarios? 4

5 The bank s managers can do the following: The bank can reduce loans to its clients The bank can sell some of its securities The bank can borrow from central bank, other banks and repurchase agreements [20 marks] TOTAL MARKS: PERFORMANCE STATISTICS FOR ASSIGNMENT 1/2011 Total number of students who submitted Assignment 1 = 31 Total score = 2085 Average score = 67% Students who scored above 50% = 29 (93.5%) Borderline cases, that is, 50% = 0 (0%) Students who scored below 50% = 2 (6.5%) Highest score = 90 % Lowest score = 42% 1.4 EXAMINATION: The First Opportunity Examination for June 2017 (as well as the Supplementary Examination taking place in July 2017) will cover the entire content of this course as suggested by the course outline and the current study guide. These are: Money-definition, the value of money and the payment system Banking and Central Banking and financial markets The demand and supply of money Monetary and fiscal policy in the IS-LM framework Asymmetric information and the regulation of financial institutions 5

6 The demand and supply of money Monetary and fiscal policy in the IS-LM framework Furthermore, you are strongly advised to study the previous Examination Question Papers for an insight into the standard of questions that may be set around the above-identified issues. Past questions are available electronically in the intranet of the Polytechnic. In case of any difficulty in accessing them, do phone the Subject Librarian. She will assist you. Her direct phone number is Also, do consider the formation of Study Groups in order to share and cross-fertilise ideas on issues related to the course. Furthermore, you should keep in close contact with the full-time and part-time students since they are benefiting a great deal from the daily face-to-face contacts with their Lecturer. Do not forget to read your Study Guide for the course from the beginning to the end. Finally, do not hesitate to contact Mr. Eden Tate Shipanga (The Lecturer for this course) should the need arise. 1.5 ACTIVITIES IN THE STUDY GUIDE The activities in the study guide are meant to provide additional intellectual challenge to you. Do attempt to go through the activities in the study guide as they will really provide you with practice questions needed for the mastery of the content for this course. 6