Sample final exam b Essay Example

Sample final exam b Essay Example Sample final exam b Essay Sample final exam b Essay For credit, you must show work on written questions. For example you must show calculations and not just the answer. Keep your eyes on your own exam. Academic honesty is expected. Relax and Good Luck! Formulas: Federal Funds Rate Target = Inflation Rate + Equilibrium Real Fed Fund Rate 1/2(inflation gap) + 1/2(output gap) Page 1 of 9 Multiple Choice Questions (60 points total, 2 points per question) 1) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) established higher reserve requirements for nonmember than for member banks. B) established higher reserve requirements for member than for nonmember banks. C) abolished reserve requirements. D) established uniform reserve requirements for all banks. 2) The case for Federal Reserve independence does not include the idea tm A) political pressure would impart an inflationary bias to monetary policy. Politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) policy is always performed better by an elite group such as the Fed. D) a Federal Reserve under the control of Congress or the president might mall « the so-called political business cycle more pronounced. Members Of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations from the Boar of Governors. B) with hold appropriations from the Federal Open Market Committee. C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies. D) instruct the General Accounting Office to audit th e foreign exchange market functions of the Federal Reserve. 4) Excess reserves are equal to A) total reserves minus discount loans. B) vault cash plus deposits with Federal Reserve banks minus required reserves. C) vault cash minus required reserves. D) deposits with the Fed minus vault cash plus required reserves. 5) Spoof that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has vault cash. A) two B) eight C) nine D) ten million dollars in 6) When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases A) reserves increase. B) high-powered money Increases. C) reserves decrease. D) high-powered money decreases. Page 2 of 9 in market interest rates relative to the discount rate will cause discount borrowing to A) fall; increase B) rise; decrease C) rise; increase D) fall; remain unchanged 8) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change. 9) If the required reserve ratio is one-third, currency in circulation is $300 lion, checkable deposits are $900 billion, and there is no excess reserve, then the monetary base is A) $300 billion. B) 5600 billion. C) $333 billion. D) $667 billion. 10) During the 2007-2009 financial crisis the currency ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly. 1 1) Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings? A) Paying interest reduces the effective tax on deposits. B) Paying interest will help in the implementation of monetary policy. C) Paying interest will help the Federal Reserve have more control of the amount f discount loans. D) Paying interest increases the capacity of the Feuds balance sheet which will make it easier to address financial crises. 12) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped. 3) The interest rate charged on overnight loans of reserves between banks is the A) prime rate. B) discount rate. C) federal funds rate. D) Treasury bill rate. Page 3 of 9 14) If float is predicted to decrease because of unseasonably good weather, he manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a A) defensive; sale open market B) defensive; purchase C) dynamic; sale D) dynamic; purchase 1 5) The dis count rate is kept of securities. The federal funds rate because the F-De prefers that A) below; banks borrow reserves from each other. B) below; banks borrow reserves from the Fed. C) above; banks borrow reserves from each other. D) above; banks borrow reserves from the Fed. 1 6) From before the financial crisis began in September Of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Feuds balance whet and the monetary base did not result in a large increase in monetary supply because A) most of it just flowed into holdings of excess reserve. B) the Fed also increased the required reserve ratio C) the Fed also conducted open market sales. D) the discount loan decreased. 7) If the unemployment rate is higher than the natural rate of unemployment, based on the Phillips curve, A) inflation will be higher. B) inflation will be lower. C) inflation expectations will be higher. D) inflation expectations will be lower. 18) One of the problems with higher inflation is A) higher economic growth. B) difficulty predicting relative price movements. C) larger decreases in inflation expectations. D) sma ller movements in equilibrium real interest rates. 19) Which set of goals can, at times, conflict in the short run? A) High employment and economic growth. ) Interest rate stability and financial market stability. C) High employment and price level stability. D) Exchange rate stability and financial market stability. 20) The decision by inflation targets to choose inflation targets reflects the concern Of monetary policymakers that particularly gem inflation can have substantial negative effects on real economic activity. A) below; high B) below; low C) above; high D) above; low Page 4 of 9 21) The problems of raising the level of the inflation target include A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B) the costs of higher inflation in terms of the distortions it produces in the economy are high. C) it is more difficult to stabilize the inflation rate at a higher targeting level. D) all of the above. 22) Which of the following is a potential operating instrument for the central bank? A) The monetary base B) The MI money supply C) Nominal GAP D) The discount rate 3) According to the Taylor principle, when the inflation rate rises, the nominal interest rate should be Increase. A) increased; more B) increased; less C) decreased; more D) decreased; less by than the inflation rate 24) The monetary transmission mechanism that links monetary policy to GO through real interest rates and investment spending is called the A) traditional interest-rate channel. B) Dobbins q theory. C) wealth effects. D) cash flow channel. 25) If monetary policy can influence prices and conditions in markets, then it can affect spending through channels other than the traditional interest-rate channel. A) asset; labor B) asset; credit C) commodity; labor D) commodity; credit 26) During the Great Depression, Dobbins q A) rose dramatically, as did real interest rates. B) fell to unprecedented low levels. C) stayed fairly constant, in contrast to most other economic measures. D) rose only slightly, in spite of Hovers attempts to prop it up. Page 5 of 9 27) Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a which the adverse selection problem, thereby in net worth, increased lending to finance investment spending. A) decline; increases; encouraging B) rise; increases; discouraging C) rise; reduces; encouraging D) decline; reduces; discouraging 28) An expansionary monetary policy raises firms cash flows by interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal 29) The Federal Reserve has been preemptive because of the changing view that monetary policy has to be A) more; forward B) more; backward C) less; forward D) less; backward looking. 0) Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1 982 and the early sass indicate that the Fed had shifted to 8) embowered reserves C) excess reserves D) required reserves Page 6 of 9 as an operating target. A) borrowed reserves Written Questions (60 points total, 20 points per question) Written Queerest #1 (20 points total) Suppose the following T-accounts represent The Central Bank and The Regular Bank (billions of dollars). The central Bank T-Account Assets Liabilities Government $BIBB Currency $BIBB Securities in Circulation Reserves $BIBB The Regular Bank T-Account $1 BOB Checking $BIBB Deposits Government Loans Equity Capital $BIBB a) Suppose the reserve requirement is 10%, calculate the money multiplier. B) Suppose The Regular Bank decided to no longer hold excess reserves. Draw new Discounts showing one possible initial change from this. Calculate the money multi pliers. C) If The Central Bank decides to rent a helicopter and drop $508 in newly printed money on the population, what would happen to the money supply ultimately based on part a)? What would happen based on part b)? Page 7 of 9 Written Question #2 (20 points total) F-or each part, Start by supposing the Federal Reserve current has a discount rate of 6% and the equilibrium federal funds rate is 5%, and the Fed pays 5% on excess reserves. Also, assume that there are currently SOB borrowed reserves. Sing a supply and demand diagram show the effects of an open market purchase and briefly explain the effect on the federal funds rate, non- borrowed reserves, and borrowed reserves (up/down/stay the same).