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

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```					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)

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