Neco 2017 Economics Question 8

Practice essay / theory question 8 from the 2017 Neco Economics examination. This question covers Money and Banking .

Neco 2017 Economics Essay / Theory

Topic: Money and Banking

Question 8 NECO • 2017 • ECONOMICS • essay

The Central Bank of Country Y is reviewing its monetary policy stance. The following data are available for the current quarter: - Total commercial bank deposits = ₦5,000 million - Required reserve ratio (RRR) = 10 % - Banks hold excess reserves equal to 5 % of total deposits. - The Central Bank purchases government securities worth ₦200 million in an open‑market operation. - The discount rate is reduced from 12 % to 10 %. - The interest rate on Treasury bills is currently 9 %. Using the above information, answer the following questions:

Question Parts

( a )

Calculate the theoretical money multiplier before the open‑market purchase.

( b )

Determine the change in the money supply (ΔM) resulting from the open‑market purchase, assuming the multiplier remains unchanged.

( c )

Explain how the reduction in the discount rate from 12 % to 10 % is expected to affect the money supply and interest rates, linking your answer to the data on Treasury bill yields.

( d )

Discuss two potential risks that the Central Bank should monitor when using open‑market purchases and discount‑rate cuts simultaneously as expansionary tools.

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About This Question

This is Neco 2017 Economics Question 8. It is one of the essay questions from the 2017 Neco Economics examination.

The question covers Money and Banking .

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