Money Banking Finance

DURATION

3 HOURS

INSTRUCTIONS TO CANDIDATES

NO. OF QUESTIONS SET NO OF QUESTIONS TO BE ATTEMPTED 8 (EIGHT) 5 (FIVE)

TOTAL NUMBER OF PAGES : 5 ( INCLUDING COVER)

MONEY, BANKING AND FINANCE

ANSWER FIVE(5) QUESTIONS AT LEAST TWO(2) FROM EACH SECTION.

SECTION A

1(a) Discuss Patinkin’s (1965) proof that in Walrasian general equilibrium model including the money market, there is an inconsistent and invalid classical dichotomy. (15 marks)

(b) Explain Patinkin’s (1965) solution to make the model discussed in (a) above determinate and consistent. (10 marks) 2 (a) Evaluate the alternative theories of money demand. (15 marks) (b) Highlight the main empirical issues in estimating and formulating a money demand function for a developing economy like Mauritius. (10 marks) 3. To what extent the alternative theories of interest rate determination can explain the level and behaviour of major interest rates in Mauritius? (25 marks) Write short notes on three of the following: (a) (b) (c) (d) Monetary union Central Bank independence Banking regulation Transmission mechanisms of monetary policy

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4.

(25 marks)

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SECTION B

ANSWER AT LEAST TWO(2) QUESTION FROM EACH SECTION.

5 (a) Explain fully the Two Separation Theorem. Explain and state all necessary assumptions. (6 marks) (b) Given the two variables X and Y: Probability of State of Nature 0.2 0.2 0.2 0.2 0.2 (i) State of Nature I II III IV V Variable X 14 7 10 4 5 Variable Y 0 -2 12 6 4

Calculate the mean and variance of each of these assets, and the covariance between them. (6 marks) Suppose X and Y represent the returns of two assets. Calculate the mean and variance for the following portfolios: % in X % in Y 150 -50 100 0 50 50 0 100 -50 150 (4 marks)

(ii)

(ii) (iii) (iv)

Calculate the portfolio that has the minimum variance. (3 marks) Sketch the opportunity set. (3 marks) Let portfolio A have 60% in X and portfolio B have 40% in X. Calculate the covariance between the two...