QUESTION
(a) State whether the following statements are TRUE or FALSE. Clearly explain your answer.
(i)The Keynes liquidity Preference theory stipulates that money demand is negatively related to current income and positively related to interest rate.
(ii) An increase in money in circulation leads to a proportionate increase in the general level of prices.
(b) (i) By using the Base Multiplier framework, show that the increase in monetary base increases proportionally money supply.
(ii) Briefly discuss to what extent the Central Bank can control the circulation of money in the economy.
(c) Analyse the traditional interest rate channel for transmission of monetary policy and discuss in which case it may be inefficient.
(d) Discuss how the adjustments of the repo rate by the Monetary Policy Committee (MPC) of the Bank of Mauritius can impact on the trade-off between inflation and unemployment.