Final Exam. Money, Banking and Financial Markets Dr. R

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Final Exam. Money, Banking and Financial Markets Dr. R Powered By Docstoc
					Final Exam. Money, Banking and Financial Markets

Dr. R. Minetti

Answer all the questions below. Each question carries 0.5 points (total=30 points). Write your
answers on the exam with a pen (you can use colored pens for graphs and charts).



1) Write down the formulae for consumption and investment




2) Suppose an increase in exogenous investment C0. The IS

        i)         Shifts to the left
        ii)        Shifts to the right
        iii)       Is unaltered
        iv)        Shifts to the left and changes slope

3) Suppose public expenditure increases by ten and the nominal money supply
   decreases by ten. The IS

         i) Shifts inwards
         ii) Shifts outwards
         iii) Is unaffected
         iv) Becomes flatter and shifts outwards



4) The consumption multiplier is higher when the marginal propensity to consume c is

        i)     Lower
        ii)    Higher
        iii)   Variable
        iv)    Could be any of i), ii), iii)


5) Write down the formula for the LM (interest rate i as a function of output Y)




6) Suppose an increase of the money supply. The LM

        i) Shifts to the left
        ii) Shifts to the right
        iii) Is unaltered
        iv) Shifts to the left and changes slope

7) If the money demand is perfectly rigid, the LM is

        i)     Vertical
        ii)    Horizontal
        iii)   Positively sloped
        iv)    Negatively sloped

8) If the money demand is independent of income, the LM is

        i)     Vertical
        ii)    Horizontal
        iii)   Positively sloped
        iv)    Negatively sloped

9) In the Friedman’s case, an expansionary monetary policy

        i)     Shifts the LM to the right
        ii)    Shifts the IS to the right
        iii)   Leaves the LM unaffected
        iv)    Has no effect on output

10) Draw the IS and the LM in the (i,Y) space and show the full equilibrium of the
    economy
11) Use a graph in the (i,Y) space below to show the effect on the economy of an increase in
    the reactivity of investment to the interest rate




12) “An expansionary monetary policy renders mortgages cheaper by reducing the interest
    rate”. This sentence is

        i)     Correct
        ii)    Wrong
        iii)   Could be correct or wrong
        iv)    Fiscal policy does not affect the interest rate normally

13) A firm pays interests on its debt. Which of these policies is
    likely to reduce the burden of these interests?

        i)     An expansionary fiscal policy
        ii)    An expansionary monetary policy
        iii)   A contractionary monetary policy
        iv)    Could be any of i), ii), iii)

14) Show below with a graph in the (i,Y) space the crowding out that occurs after
    an expansionary fiscal policy
15) The crowding out of private investment is bigger the ………..is the IS

        i)         Flatter
        ii)        Steeper
        iii)       More elastic
        iv)        Could be any of i), ii), iii)

17) Use a graph in the (i,Y) space below to show what happens in the economy if
    there is an expansionary fiscal policy and a contractionary expansionary monetary policy




18) Consider again the exercise in (17). The interest rate

        i)     Increases
        ii)    Decreases
        iii)   Is constant
        iv)    Could be any of i), ii), iii)

19) Keynesians believe that the IS is

        i)     Rigid
        ii)    Elastic
        iii)   Negatively sloped
        iv)    Could be any of i), ii), iii)

20) When prices are flexible, monetary policy is more effective according to

        i)     Monetarist economists
        ii)    Keynesian economists
        iii)   Both Keynesian and Monetarist economists believe it is effective
        iv)    Neither Keynesian not Monetarist economists believe it is effective
21) Suppose the IS is vertical in the (i, Y) space. Show in a graph below the crowding out




22) Consider the AD-AS model. A decrease in prices

        i)     Shifts the LM to the right
        ii)    Shifts the IS to the right
        iii)   Shifts the LM to the left
        iv)    Has a negative effect on output

23) Consider the AD-AS model. Suppose that exogenous consumption I0=W/p where W is
    the wealth of consumers and p is the price level. Following an expansionary monetary
    policy, the IS

        i)     Shifts to the left
        ii)    Shifts to the right
        iii)   Is unaltered
        iv)    Could be any of i), ii), iii)

24) When prices are flexible, the impact of a contractionary fiscal policy on output is

        i)         Bigger
        ii)        Smaller
        iii)       The same
        iv)        Could be any of i), ii), iii)

25) When prices are flexible, the impact of an expansionary fiscal policy on output is

        i)     Bigger
        ii)    Smaller
        iii)   The same
        iv)    Could be any of i), ii), iii)
26) Show below with a graph in the (i,Y) space the effect of a contractionary monetary
       policy when prices are flexible




27) When prices are flexible a contractionary fiscal policy

            i) Increases prices
            ii) Reduces prices
            iii) Leaves prices unaffected
            iv) Could be any of i), ii), iii)

28) A problem of the theory of menu costs for price rigidity is that menu’ costs are

            i) Too small
           ii) Too big
           iii) Too volatile
           iv) Too persistent

29) A liquidity trap implies that the interest rate channel of monetary policy

            i) Is operational
            ii) Is absent
            iii) Is independent of the credit channel
            iv) Could be any of i), ii), iv)

30) Moral hazard is the incentive for firms to choose……..projects after writing contracts with
    lenders

            i) Riskier
            ii) Safer
            iii) More productive
            iv) Could be any of i), ii), iii)


30) Equilibrium in the money market is represented by

   i) The IS curve.
ii) the LM curve
iii) both the IS and LM curves.
iv) Neither the IS nor the LM curve

31) As a result of new innovations in banking, money demand becomes more sensitive to change
in the interest rate. The most likely consequence of this increased sensitivity is a

 i) flatter IS curve.
 ii) steeper IS curve.
 iii) flatter LM curve.
 iv) steeper LM curve.

32) Assuming money neutrality, any increase in the money supply to stimulate the economy will
leave the level of real output unchanged because

 a. the price level will increase by the same amount as the money supply.
 b. a crowding out effect will occur due to higher nominal interest rates.
 c. real interest rates will increase.
 d. the velocity of money will fall by an amount equal to the money supply increase.

 33) In the derivation of the LM curve, the level of

  a. real money balances is assumed to be fixed.
  b. nominal money balances is assumed to be fixed.
  c. real output is assumed to be fixed.
  d. real interest is assumed to be fixed.

 34) Holding all other factors constant, an increase in the nominal return on money ----------------
  the demand for real money balances and shifts the LM curve to the -----------

  a. increases; right
  b. increases; left
  c. decreases; right
  d. decreases; left


 35) Assuming a three- sector economy- households, business, and government- wih the goods
market in equilibrium, then equilibrium national savings equals.

  a. Y
  b. Y - G
  c. G + C – Y
  d. Y - G - C

 36) If the goods market is not in equilibrium, which of the following statements is true?

  a. We are on the IS curve.
  b. We are on the LM curve.
  c. We are not on the IS curve.
  d. None of the above .
 36) In a credit crunch the bank lending channel would indicate that there would be an overall
decline4 in borrowing, with large business showing the largest decline.

  a. an overall decline in borrowing, with small business showing the largest decline.
  b. an overall decline in borrowing, with small and large business showing an equal decline.
  c. no overall decline in borrowing because business and individual would take advantage of the
interest rates caused by the weakened economy.


 37) Loans made by financial institutions

  a. are crucial to understanding the impact of monetary policy in the bank lending channel.
  b. play no considered important in the balance sheet channel.
  c. are characterized by both (a.) and (b.).




31) According to you, the interest rate and the external finance premium tend to

            i) Move together
            ii) Move in opposite directions
            iii) Move independently of each other
            iv) Could be any of i), ii), iii)




32) A firm with lower internal wealth is likely to suffer   from the bank lending channel

                i)       More
                ii)      Less
                iii)     The same
                iv)      Could be any of i), ii), iii)

33) An expansionary fiscal policy………the external finance premium faced by firms

                i) Increases
                ii) Reduces
                iii) Leaves unaffected
                iv) Could be any of i), ii), iii)

34)A central bank observes that the amount of credit in the economy has decreased. From this it
can infer that

    i)      The credit channel is at work
    ii)     The traditional interest rate channel is at work
    iii)    Both the credit channel and the traditional interest channel are at work
    iv)     It cannot infer anything
35)Suppose that the government implements a transfer scheme that transfers wealth from lenders
to firms. According to you this

    i)       Reduces the importance of the balance channel of monetary policy
    ii)      Increases the importance of the balance channel of monetary policy
    iii)     Leaves the importance of the balance channel of monetary policy unchanged
    iv)      Could be any of i), ii), iii)

36) Suppose that, following the abolition of taxes in dividends, firms distribute more profits as
dividends. This is likely to make the balance sheet channel of monetary policy

     i) Weaker
     ii) Stronger
     iii) Leave it unaffected
     iv) Could be any of i), ii), iii)




37) Describe with a chart below the bank lending channel of monetary policy
38) Draw below the balance sheet of a bank




39) According to you, the process of financial disintermediation, (i.e. the increase in the number
of financiers alternative to banks) makes the banks lending channel

    i)      Stronger
    ii)     Weaker
    iii)    Leave it unaffected
    iv)     Could be any of i), ii), iii)


40) If banks prefer shrinking securities rather than loans, the bank lending channel is likely to be

    i)      Stronger
    ii)     Weaker
    iii)    The same
    iv)     Could be any of i), ii), iii)

41) List below the three criteria for the choice of intermediate targets




42) List below three possible intermediate targets of monetary policy
43) List below two possible operating targets of monetary policy




44) Which is the best intermediate target of monetary policy if the main source of fluctuations is
the goods market?




45) Show with a graph below in the (i,Y) space which is the best intermediate target if the main
source of fluctuations is the financial (money) market




46)List below the four roles of money in the economy




    47) A decrease in the compulsory reserve requirement

            i)   Shifts the LM to the right
        ii) Shifts the IS to the right
        iii) Leaves the LM unaffected
        iv) Has a negative effect on output

48) An increase in the cash/deposit ratio

        i)     Increases the money multiplier
        ii)    Decreases the money multiplier
        iii)   Leave the money multiplier unaffected
        iv)    Could be any of i), ii), iii)

49) List below the components of the monetary base



50) According to you, an increase in the interest rate
       i) Reduces the transaction demand for money
       ii) Increases it
       iii) Leaves it unaffected
       iv) Reduces it but leads to an exactly equivalent increase in the precautionary
            demand for money

51) The demand for money in Tobin is
       i) More rigid than in Keynes
       ii) Less rigid
       iii) The same
       iv) Could be either less or more rigid

52) A reduction in the public’s cash to deposits ratio
       i) Increases the monetary base and the money supply
       ii) Increases the money supply and reduces the monetary base
       iii) Leaves the monetary base unaffected and increases the money supply
       iv) Leaves both unaffected

53) In the US open market operations are more used than in other countries because
        i) The discount rate is lower than the T-bill interbank rate
        ii) The market for government securities is more liquid
        iii) The monetary base is bigger
        iv) Banks have lower liquidity needs

54) In Tobin, the demand for money of a risk averse agent is
        i) Independent of the interest rate
        ii) Increasing in the interest rate
        iii) Decreasing in the interest rate
        iv) Could be any of i), ii) or iii)

55) In Tobin, the least risky portfolio
        i) Is always on the portfolio frontier
        ii) Is on the portfolio frontier if the agent is risk averse
        iii) Is on the portfolio frontier if the agent is risk lover
        iv) It is above the portfolio frontier when the interest rate is very high



56) Money is a better medium of exchange because
      i) It has zero return
      ii) It is less risky
      iii) It is more liquid
      iv) It is a better store of value

57) In the Divisia index of money, an asset with a lower interest rate has presumably
        i) A higher weight
        ii) A lower weight
        iii) Could be either
        iv) It depends on the inflation rate

58) “Richer economies economize on cash”. This implies that the
     money multiplier is
       i) Higher
       ii) Lower
       iii) The same, it is the monetary base that is different
       iv) Could be any of i), ii) or iii)

59) The Fed prefers setting the discount rate rather than the amount of discount loans
    when the demand for discount loans
       i) Is rigid
       ii) Is flat
       iii) Is upward sloping
       iv) Is zero
60)




61) For the central bank it is better to control the discount rate than the amount of discount
    loans because the

        i)     the supply of discount loans is rigid
        ii)    the demand for discount loans is rigid
        iii)   the demand for discount loans is horizontal
        iv)    the supply of discount loans is horizontal
62) The demand for money in Friedman is

        i)     More rigid than in Keynes
        ii)    Less rigid
        iii)   The same
        iv)    Could be either less or more rigid


63) The transaction demand for money

        i)     Depends only on output
        ii)    Depends only on the interest rate
        iii)   Depends on output and on the interest rate
        iv)    Does not depend either on output or on the interest rate

64) In Tobin, the demand for risky bonds of a risk lover is

        i)     Independent of the interest rate
        ii)    Increasing in the interest rate
        iii)   Decreasing in the interest rate
        iv)    Could be any of i), ii) or iii)

65) An increase in the interest rate is likely to ……………the voluntary reserves of
   banks

        i)     Increase
        ii)    Decrease
        iii)   Leave unaffected
        iv)    Could be any of i), ii), iii)

66) An ill-functioning market for government bonds is likely to make open market
    operations

        i)     Less desirable
        ii)    More desirable
        iii)   Indifferent
        iv)    Could be any of i), ii), iii)

67) You know that the monetary base is 10, the coefficient of compulsory reserve
    requirement is 10%, the coefficient of voluntary reserve requirement is 10%, the cash
    deposit ratio is 10%. Calculate the money supply.




68) Government bonds are………….the monetary aggregate M2

        i)     Excluded from
        ii) Included in
        iii) Included only if they are short term (3 or 6 months)
        iv) Included only if they are long term (more than 6 months)


69) The creation of new financial instruments has blurred the definition of money. This has
    implied that, relative to the past, now central banks focus on

        i)     Broader monetary aggregates (such as M2 or M3)
        ii)    Narrower monetary aggregates (such as M1)
        iii)   Credit aggregates
        iv)    Exchange rates


70) List two advantages or drawbacks of Discount Policy




60) M3 contains

    i) More liquid instruments than M2
   ii) Less liquid instruments than M2
   iii) Instruments as liquid as M2
   iv) Could be any of i), ii), iii)