Q.1    Please write the alphabate of selected choice in the answer column:                               (08)

                                                                                                                                                   (Answer)

i	According to quantity theory of money, if the real output and velocity of money are kept as constant then A) the price level will be equal to money supply. B) the price level will not be equal to money supply. C) the inflation rate will be greater than the growth in money supply D) the inflation rate will be lower than the growth rate of money supply. E) the inflation rate will remain unchanged.
ii	If the nominal GDP and prices of goods and services are increasing simultaneously, then A) the potential of the economy will also be expanding. B) the real GDP will remain unchanged. C) the growth in real GDP will be greater than the growth rate of prices. D) the real GDP will decline. E) we can not draw any conclusion about the increase or decrease in the real GDP.
iii	Macroeconomic targets of many countries include: A) sustainable economic growth, external stability, and deflation. B) high growth, low interest rates and low unemployment. C) price stability, economic growth, and full employment. D) deflation, capital market stability, and stable prices. E) low cost of borrowings, effective price mechanism, and high unemployment.
iv	The liquidity constraints: A) explain why people do not reduce consumption. B) Indicate an individual’s inability to borrow against future income C) explain why consumption is sensitive to temporary changes in income. D) Includes items given in A, B, and C. E) explain why people reduce private investment.
v	The monetary policy enjoys an advantage over fiscal policy because A) central banks are relatively more autonomous. B) the cost of printing money is estimated to be low. C) the interest rate approaches almost zero level in case of severe recession. D) banks can extend loan out of their excess reserves during recession. E) it is less influenced by political pressure besides having small administrative lags.
vi	Components of money supply (M2) in Pakistan include all except A) currency in circulation. B) non-resident foreign currency deposits. C) bank deposits with central bank. D) cash in tills of banks. E) demand deposits.
vii	When an economy expands, A) the size of country’s population becomes larger. B) the exports loose competitiveness. C) the supply of resources expand with optimal utilization. D) the government provides more subsidies to business community. E) the internal-external balance deteriorates.
viii	If the government decides to reduce expenditure and increase taxes, such a policy stance will be called: A) a balance budgetary stance. B) an anti-recession stance. C) a pro-cyclical stance. D) a cyclical balanced budgetary stance. E) a pro-growth stance.

Q.2    State True or False in the answer column. Give brief reason for your selection at the
          space provided below the question:                                                                                 (06)
                                                                                                                                                 (Answer)

i	If State Bank of Pakistan purchase newly created debt of the government, the government is said to have a budget deficit.
ii	If the country with fixed exchange rate regime faces a balance of payments problem. To maintain the fixed exchange rate regime, the central bank obtains domestic currency from the market.
iii	If scheduled banks extend loans out of their funds kept in the ‘cash in tills’, it will cause an instant rise in money supply.
iv	Monetary expansion stimulates investment during recession.
v	If money supply is kept unaltered, the rise in transactions demand for money will lead to an increase in interest rates.
vi	The concept of Islamic finance differs from traditional financing because Islamic finance emphasizes on socially responsible investing.

Q.3     Please write the alphabate of selected choice in the answer column: (08)

i	If other things remain constant, a rise in bonds yield cuase asset demand for money to ___________________ A) rise                        B) fall C) remain unaltered as the nominal GDP does not change. D) remain unaltered as input prices do not change.
ii	The best monetary policy rule suggests that ______________ (A) the government borrowings should be financed form external sources. (B) the government needs should be financed by printing of money. (C) the money supply should be kept as constant. (D) the money supply should grow according to the growth of potential        GDP.
iii	If we keep velocity of money constant while the economy is operating at potential level, then a rise in money supply will cause_____________ A) a price hike. B) an increase in real GDP. C) a fall in nominal GDP. D) an increase in real investment spending.
iv	Metallic money can be classified into the following except the ___ (A) standard money              (B) inconvertible paper money (C) token money                  (D) subsidiary money
v	Exchange rate over shooting help us know_____________ (A) why exchange rates move so sharply form day-today. (B) why exchange rates remain unchanged in the long-run. (C) why exchange rates remain constant in the medium-term. (D) why prices are flexible in the short-run.
vi	If State Bank of Pakistan intends to check inflation, it needs to ___ (A) increase the cash reserve requirement to impact lending ability of banks. (B) reduce the cash reserve requirement so that banks can lend more. (C) keep the cash reserve requirement constant. (D) increase the cash reserve requirements so that banks could keep more       forex reserve with SBP.
vii	As market interest rates ________, the price of bonds _________ (A) decline, remain constant.            (B) increase, rise. (C) fall, decline.                               (D) rise, decline.
viii	If the central bank reduces its discount rates, the money supply _____, the interest rates _____, the investment _______, and the GDP _______. (A) declines, rise, falls, decreases.      (B) increases, rise, falls, increases. (C) declines, fall, rises, deceases.       (D) increases, fall, rises, increased.

Q.4. i) The BASEL-II accord stresses upon the banking sector regulators to make it compulsory for banks to measure liquidity risks. If banks do not measure the liquidity risks, what kind of problems you anticipate to be emerged in the banking system affecting the economy? (05)

Q.4 ii) It is argued that the banking system in an economy help boost growth by providing an efficient intermediary services. If the financial intermediaries are not working efficiently in an economy due to financial repression problem, what policy agenda you suggest policymakers to make efficient the intermediary role of financial institutions? (05)

Q.4 iii) Speculative attacks lead to massive selling of domestic assets by investors. However, an appropriate exchange rate regime is supposed to be helpful in minimizing the impact of speculative attacks. In your opinion, what type of exchange rate regime (fixed or any type of flexible exchange rate regime) could be suitable for a small open economy vulnerable to speculative attacks?                   (05)

Q.4 iv) The IT based system has brought revolution in banking operations. Banks are switching rapidly from tangible cash transaction system to e-banking. Although the IT based system has improved customers’ services substantially, there are some disadvantages which are affecting the credibility of e-banking. You are required to identify some disadvantages of e-baking and suggest remedial measures for improvements. (05)

Q.5 What is a credit boom episode? What are the causative factors of credit booms? How credit boom episodes lead to a banking Crises? (10)

Q.6 What is the transmission mechanism of monetary policy? Explain various channels of monetary policy through which it affects an economy. (10)

Q.7 What are the salient features of Islamic banking? Explain the role of Islamic banks in the development process of an economy. (10)

Q.8 Define inflation. Explain three types of inflation included in the triangle model of Neo-Keynesian.                                                                                                                     (10)

Q.9 Write short notes on any two of the following topics:  (10)
           i)     Determinants of money demand.
          ii)     Currency Board.
         iii)     How monetary policy affects equilibrium level of GDP?
         iv)     Tier 1 Capital.

Q.10 Extract from SBP Monetary Policy Statement July-December, 2006.

“The central bank will continue to focus on both of its performance objectives, i.e. price stability and growth during FY07, though the current balance of risk requires greater focus on containing inflation. Therefore it intends to continue with its tight monetary policy during H1-FY07. In line with its mandate, SBP will continue to monitor the risks to the economy elaborated earlier, and stands ready to modify its polices appropriately in order to protect the long-term growth prospects of the economy”.

Briefly comment on the above policy statement.     (08)