Money and Banking — DU B.A. (Hons.) Economics Previous Year Question Papers

1. The Federal Reserve seeks to simultaneously achieve a target unemployment rate of 4% and an inflation rate of 2%. However, the economy is currently experiencing both higher inflation and higher unemployment than desired within the short-run AD. AS framework. In response, the central bank implements an expansionary monetary policy by increasing the money supply, shifting aggregate demand rightward. Despite this intervention, only one of the two objectives is attained. (a) Using the Tinbergen Rule, explain why the central bank cannot achieve both targets simultaneously. (b) Analyse the limitation of monetary policy within the short-run AD-AS framework, particularly when policy instruments primarily affect aggregate demand. (8) a Interest a fares (9) (i) Penise at di Bear irs (discount yield) (3) at 7a4 (fixed-for-floating interest rate swaps) #T (c) Briefly explain the different lags associated with the implementation of monetary policy in India. 2. (a) The introduction of Central Bank Digital. Currencies (CBDCs) represents a significant shift in monetary systems. Discuss its potential effects on the traditional banking system in India, highlighting both opportunities and risks, along with measures to manage them. (8) (b) The growth of payment systems reflects broader financial sector development. Discuss the evolution of payment systems in India and analyse the regulatory framework, highlighting the roles of the principal institutions involved. (10) 3. (a) Discuss the distinguishing features of Commercial Paper (CP) and Certificate of Deposit (CD) with respect to structure, regulation, participants, and risk. Applying your understanding to the Indian context, determine which instrument more effectively serves short-term corporate financing needs and explain why. (9) (b) Provide a brief account of the effectiveness of the monetary policy transmission mechanism in India during the period February 2019 to January 2020. In your answer, evaluate both the "inner leg" and the "outer leg" of transmission, and discuss the role of institutional reforms such as the external benchmarking system. (9) 4. (a) Discuss the evolution of the lending rate frameworks of the Reserve Bank of India from the PLR regime to the MCLR system. In your answer, analyse their effectiveness in transmitting monetary policy signals, evaluate the limitations inherent in each framework, and explain how these limitations led to subsequent reforms in the interest rate setting mechanism. (9) (b) Ravinder, a fixed-income investor, is comparing a coupon bond'and a discount bond in the secondary market. The coupon bond has a face value of 71,000, an annual coupon rate of 8%, a maturity of one year, and is priced at 7950. The discount → t (transmission mechanism) ai a sa (external benchmarking system) 141047 (Certificate of Deposit - CD) ent Fictit, bond is available at 7940 and matures at 71,000 in (i) Calculate the annual coupon payment and current yield of the coupon bond. (4)