Q.1Are the following statements true, false or uncertain? Explain your answer either logically, mathematically or graphically but not in more than 4sentences. Each part of

this question has 2 marks. (0.5 +1.5)

a."A cost-push inflation which occurs as a result of workers' attempts to push up their wages, does not have to be a monetary phenomenon."

b."The less important expectations about policy are to movements of the aggregate supply curve, the stronger the case is for activist policy to eliminate unemployment."

c."The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates."

d."Monetary policy can beineffective in reviving a weak economy if short-term interest rates are already near zero;"

e."If the demand for money did not fluctuate, the State Bank of Pakistan (SBP) could pursue both a money supply target and an interest-rate target at the same time."

f."Nominal interest rates can be measured more accurately and more quickly than the money supply. Hence an interest rate is preferred over the money supply as an intermediate target."

g."You often read in the newspaper that the SBP has just lowered the discount rate. Does this signal that the SBP is moving to a more expansionary monetary policy, provided that KIBOR is the target rate?"

h."The following yield curve suggests that the market expects inflation to fall moderately in the near future but to rise later on."

i."The expected-inflation effect of an increase in the money supply is a rise in interest rates in response to the rise in the expected inflation rate."

j."The bond market and money market are mirror image of each other, i.e.; if there is excess demand for bonds in the bond market, there must be excess supply of money in the money market."

Q.2 a. The growth rate of Pakistan economy was negative for 2019-20, i.e.; Pakistaneconomy experienced a recession in the last fiscal yearGraphically explain theeffect of the recession on the economy in terms of interest rate, quantity of bondsand their prices by using the framework ofbond market.(4+6)

b."Yield on a discount basis understates the more accurate measure of the interestrate, the yield to maturity; and the longer the maturity of the discount bond, thegreater this understatement becomes." Do you agree with the statement? Explainyour answer.(8)

c.Write down the formula that is used to calculate the yield to maturity on a 20-year

10% coupon bond with $1,000 face value that sells for $2,000. (2)

Q.3 a. Assuming that the expectations theory is the correct theory of the term structure,calculate the interest rates in the term structure for maturities of one to five years,and plot the resulting yield curves for the following path of one-year interest ratesover the next five years:5%, 6%, 7%, 6%, 5%. How would your yield curve changeif people preferred shorter-term bonds over longer-term bonds?(4+1)

b.Develop the supply and demand framework of the market for reserves. Using thissupplyand demand of the market for reserves, show what happens to the KIBOR,holding everything else constant, if the economy is surprisingly strong, leading to

a rise in the amount of checkable deposits.(2+3)

c.If the State Bank of Pakistan has an interest-rate target, why a rise in money

demand lead to a rise in the money supply?(5)

d."If the public believes that the monetary authorities will pursue an

accommodating policy, a cost-push inflation is more likely to develop." Is thisstatement true, false, or uncertain? Explain your choice.