Econ 3200: Money and Banking.
READ THE ATTACHED DOCUMENT ON MONEY SUPPLY (OR SEE THE APPENDIX) AND ANSWER THE FOLLOWING QUESTIONS. YOU MAY USE A GRAPH OR AN EQUATION.
1. Would quantitative easing result in rapid inflation? Why or Why not?
2. Would massive injections of liquidity create financial imbalances? Why or Why not?
3. Some economists view that the Federal reserve should have left the market untouched, that is FED should not have not interfered and injected huge sums of money in the banking system. What is your opinion?
Summer II 2017
Econ 3200: TAKE HOME FINAL
Econ 3200: Money and Banking
Instructor: Prof. S. Ghosh
PART A: (30 POINTS)
Q. 1: The Federal Open Market Committee (FOMC) is headed by the President of the United States
a. True ——; b. False—–
Q 2. The main argument for Fed independence is that:
a. Monetary policy is too important and technical to be determined by politicians.
b. Because of the frequency of elections, politicians may be shortsighted, concerned with short-term benefits without regard for potential long-term costs.
c. The public may well prefer that the experts at the Fed, rather than politicians, make monetary policy decisions.
d. All of the above
e. None of the above
3. A country’s monetary base depends on its:
a. Total currency in circulation plus all bank deposits
b. Total currency in circulation plus reserves
c. All deposits including bond holdings and excess reserves
d. None of the above
4. Required reserve ratio is defined as the percentage of checkable deposits that the Fed specifies that banks must hold as reserves
a. True; b. False —-
5. Simple deposit multiplier is the ratio of the amount of deposits created by banks to the amount of new reserves
a. True —–; b. False—–
6. Key assumptions for deriving the money multiplier are:
a. Banks hold no excess reserves.
b. The nonbank public does not increase its holdings of currency.
c. a and b both
d. None of the above
7. Given that South Africa’s Central Bank’s reserve ratio being 2.5% and Kenya’s Reserve ratio being 5.25% where do you think a $1 million dollar investment will generate more money supply?
a. Kenya —–; b. South Africa —-
8. Suppose Vietnam’s current financial systems show that it has 300 billion dollars of Currency in circulation; 600 billion dollars of deposits and 100 billion dollars of Excess reserve. Given that its Central bank’s reserve requirement being 5% one can safely say that it’s money multiplier is:
a. 2.1; b. 4.5; c. 8; d. 10
10. The U.S. Central bank or the Federal Reserve has dual mandates — price stability and maximum employment
a. True —-; b. False —–
11. The U.S. Fed has mainly three major policy tools which are:
a. Open market operation; Reserve requirement and Discount window
b. Open market operation, Buying and selling bonds and setting of the discount rate
c. Open market operation, intervening in the foreign exchange market and changing the reserve requirement
d. None of the above
Answer Questions 12-14 based on the following diagram:
Funds rate
5.0 S2
4.5 S1
D
0 R2 R1 Reserves (R)
12. Due to Fed’s Open market purchase of securities the supply curve for Reserves shifts from S1 to S2.
a. True —–; b. False —-
13. The federal Funds Rate increases from 4.5% to 5% because of:
a. Fed’s open market Purchase of treasury securities
b. Fed’s open market Sale of treasury Securities
c. Demand for Treasury increases because banks buy more treasury securities
d. None of the above
14. Because of Fed’s Open market action, the Federal Funds rate increases from 4.5% to 5%, this would lead to increase in money supply
a. True —–; b. False —-
15. An open market purchase by the Fed is an expansionary policy because it reduces interest rates whereas an open market sale is a contractionary policy.
a. True —–; b. False —-
(Bonus)
16. Quantitative easing is the central bank policy that attempts to stimulate the economy
a. by buying long-term securities
b. by selling long-term securities
c. by changing the Reserve requirement
d. None of the above
PART B
17. (20 POINTS)
READ THE ATTACHED DOCUMENT ON MONEY SUPPLY (OR SEE THE APPENDIX) AND ANSWER THE FOLLOWING QUESTIONS. YOU MAY USE A GRAPH OR AN EQUATION.
1. Would quantitative easing result in rapid inflation? Why or Why not?
2. Would massive injections of liquidity create financial imbalances? Why or Why not?
3. Some economists view that the Federal reserve should have left the market untouched, that is FED should not have not interfered and injected huge sums of money in the banking system. What is your opinion?
18. (5 POINTS)
Explain why the following statement is Not true.
In order to achieve price stability and full employment the Federal Reserve can increase the interest rate for deposits by changing the corporate and personal income tax rate
a. True —-; b. False —
Appendix:
Monetary Policy Case Study Predicting Federal Reserve Actions in an Era of Uncertainty
POLICY CONTEXT
In response to the 2008-09 financial crisis and subsequent recession, the Federal Reserve cut short-term interest rates effectively to zero and lowered long-term rates through multiple large-scale asset purchase programs (i.e., “quantitative easing”). This unprecedented use of monetary policy eased financial stress and improved rate-sensitive sectors of the economy. However, it also created uncertainty around the effects of both QE and the Fed’s exit strategy.
Keybridge’s clients across all sectors have become increasingly concerned about the implications of Fed policies for their businesses. Over the past several years, many questions have arisen. Would quantitative easing result in rapid inflation? Would massive injections of liquidity create financial imbalances? When will the Fed begin to unwind quantitative easing? Will the inevitable rise of interest rates stifle the housing market recovery? Who will be the next Fed chairperson, and what will that mean for monetary policy moving forward?
APPROACH
Keybridge’s economists provide a number of services to clients concerned with monetary policy and how it might affect their businesses. Through regular correspondence, Keybridge has delivered timely and insightful analysis and guidance to clients.
(1) Tracking the Federal Reserve: Keybridge closely follows the Fed’s public statements, meeting minutes, and policy actions. Based on more than 30 years of experience, Keybridge’s economists use their knowledge of the Fed’s inner workings and the overall macroeconomic environment to help clients anticipate the Fed’s next moves.
(2) Custom “Fed Reaction Functions”: In addition to studying traditional “Taylor Rules,” Keybridge has developed its own Fed Reaction Functions to estimate the appropriate level for short-term interest rates.
(3) Economic and Inflation Momentum Monitors: Keybridge publishes monthly leading indicators on U.S. economic growth and inflation that provide clients with a 3 to 6 month outlook. These tools help anticipate the economic environment the Fed will be operating under in the near future.
RESULT
Keybridge’s analysis, forecasts, and strategic guidance have helped clients make smarter decisions and mitigate risks. Global investors have gained greater understanding of the timing and magnitude of interest rate movements that affect their investment returns. Chief Economists at Fortune 100 companies have garnered new insights that they have used to advise their executives on key strategic decisions; and trade associations have used Keybridge’s views on monetary policy to help shape their economic agenda.
