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Questions and Answers of Banking

Which of the following factors would increase the portfolio demand for money? Explain your choices.(a) A new website allows you to liquidate your stock holdings quickly and cheaply.(b) You expect
Why is inflation higher than money growth in high inflation countries and lower than money growth in low inflation countries?
If velocity were constant at 2 while M2 rose from $5 trillion to $6 trillion in a single year, what would happen to nominal GDP? If real GDP rose 3 percent, what would be the level of inflation?
Explain why we observed a fall in the velocity of M2 during the financial crisis of 2007-2009.
Comment on the role given to money in the monetary policy strategy of the ECB.
Countries A and B both have the same money growth rate and in both countries, real output is constant. In Country A velocity is constant while in Country B velocity has fallen. In which country will
Consider a country where the level of excess reserves fluctuates widely and unpredictably. Would such a country be a good candidate for a money growth rule to guide monetary policy? Explain your
*Suppose a central bank is trying to decide whether to target money growth. Proponents of the move are confident that the new policy would be successful as, under the existing policy regime, they
A scatter plot can reveal a relationship between two indicators. Construct a scatter plot of annual data beginning in 1959 for inflation and money growth. Measure these as the percent change from a
Plot the percentage change from a year ago of the velocity of money (FRED code: A14187USA163NNBR) between 1922 and 1939. Compare the typical scales of the velocity declines during the recessions of
In Chapter Data Exploration Problem 2, you plotted the inflation rate together with the gap between the Taylor rule and the federal funds rate. Visually, when the Taylor rule gap was positive,
In Figure 20.1, which compares money growth and inflation over an extended time period, is Mexico a country above or below the 45oline? Plot since 1987 on a quarterly basis the percent change from a
In theory, the velocity of money should rise with the cost of holding it. To assess the theory, plot the opportunity cost of holding M2 – defined as the difference between the three-month Treasury
Describe the determinants of the long-run real interest rate and speculate on the sort of events that would make it fluctuate.
Explain how and why the components of aggregate expenditure depend on the real interest rate. Be sure to distinguish between the real and nominal interest rates, and explain why the distinction
Suppose that the aggregate expenditure curve can be expressed algebraically as AE = 3,000 – 2,000r,Where AE is aggregate expenditures and r is the real interest rate expressed as a decimal. You
Suppose the U.S. economy is in equilibrium at the long-run real interest rate that prevails when aggregate expenditures equal potential output. Draw a diagram of aggregate expenditures showing this
Explain why the short-run aggregate supply curve is upward sloping. Under what circumstances might it be vertical?
Assume the short-run aggregate supply curve can be expressed algebraically asY = 4,800 + 3,000πand the dynamic aggregate demand curve can be written as Y = 5,000 – 1,000π.Find the numerical value
Suppose the real interest rate unexpectedly falls in the absence of other economic changes. What would you expect to happen to (a) Consumption,(b) Investment, and (c) Net exports?
Given the expected relationship between the real interest rate and investment, how would you explain a scenario where investment continued to fall despite low or even negative real interest rates?
Economy A and Economy B are similar in every way except that in Economy A, 70percent of aggregate expenditure is sensitive to changes in the real interest rate and in economy B, only 50 percent of
State whether each of the following will result in a movement along or a shift in the monetary policy reaction curve and in which direction the effect will be.(a) Policymakers increase the real
Suppose a natural disaster wipes out a significant portion of the economy’s capital stock, reducing the potential level of output. What would you expect to happen to the long-run real interest
Explain how each of the following affects the short-run aggregate supply curve.a. Firms and workers reduce their expectations of future inflation.b. There is a rise in current inflation.c. There is a
Why do you think the surge in oil prices in 2007-2008 had a much smaller impact on inflation expectations compared with the oil price shocks of the 1970’s?
The European Central Bank’s primary objective is price stability. Policymakers interpret this objective to mean keeping inflation below, but close to, 2 percent, as measured by a euro-area consumer
Consider Panel B of Figure 21.16, where the short-run equilibrium occurs at an output level below potential output, Yp. Suppose that the initial inflation target is at point 2, but the central bank
Suppose the economy is in short-run equilibrium at a level of output that exceeds potential output. How would the economy self-adjust to return to long-run equilibrium?
You read a story in the newspaper blaming the central bank for pushing the economy into recession. The article goes on to mention that not only has output fallen below its potential level but that
Are long-term inflation expectations €œwell anchored?€ Using monthly data since 2003, plot a measure of long-term inflation expectations based on the difference between the
Is investment sensitive to the real interest rate? Plot since 1990 a measure of the real interest rate based on the difference between Moody’s Baa corporate rate (FRED code: BAA) and a survey of
How sensitive is private investment to risk? Plot since 2004 the share of real gross private domestic investment (FRED code: GPDIC1) in real GDP (FRED code: GDPC1) and (on the right scale) a measure
A recession may reflect declines in aggregate demand, aggregate supply, or both. Are swings in consumer sentiment characteristic of recessions? Plot a measure of sentiment (FRED code: UMCSENT) and
How often is negative supply shocks associated with recessions? Plot on a quarterly basis since 1971 the real price of oil measured as the ratio of the nominal price of oil (FRED code: OILPRICE) to
Define the term stabilization policy and describe how it can be used to reduce the volatility of economic growth and inflation. Do stabilization policies improve everyone's welfare?
Explain why stabilization policies are usually pursued using monetary rather than fiscal policy.
Explain why the rise in oil prices in 2008 created a particularly difficult situation for Federal Reserve policymakers.
After examining Figure 22.6, explain the potential link between innovations in financial markets and output volatility since the 1980s. You should consider both the “Great Moderation” and the
*According to real business cycle theory, can monetary policy affect equilibrium output in either the short run or the long run?
The economy has been sluggish, so in an effort to increase output in the short run, government officials have decided to cut taxes. They are considering two possible tax cuts of equal size in terms
Starting with the economy in long-run equilibrium, use the aggregate demand-aggregate supply framework to illustrate what would happen to inflation and output in the short run if there were a rise in
Consider again the rise in consumer confidence described in Problem 10. What would happen to inflation and output in the long run if the central bank remained committed to it original inflation
Suppose that consumer confidence unexpectedly rises six months before the central bank detects the change or its magnitude. Compared to your answer to Problem 11, what happens to inflation and output
How would a shock that reduces production costs in the economy (a positive supply shock) affect equilibrium output and inflation in the both short run and the long run? Illustrate your answer using
Suppose, instead of waiting for the economy described in question 13 to return to long-run equilibrium, the central bank opted to use the positive supply shock as an opportunity to move to a lower
*Suppose a natural disaster reduces the productive capacity of the economy. How would the equilibrium long-run real interest rate be affected? Assuming the central bank maintains its existing
*Monetary policymakers observe an increase in output in the economy and believe it is a result of an increase in potential output. If they were correct, what would the appropriate policy response be
*Consider a previously closed economy that opens up to international trade. Use the aggregate demand-aggregate supply framework to illustrate a situation where this would lead to lower inflation in
*In face of global oil price shocks, what could monetary policymakers do to minimize the resulting recessionary gaps? What would be the trade-off of such a policy? Illustrate your answer using the
Changes in oil prices shift the short-run aggregate supply (SRAS) curve. Consider how volatility in oil prices may influence the economy’s short-run equilibrium, which occurs at the intersection of
Explain why fiscal policy played a greater role than usual in the response to the 2007-2009 recession.
Explain why monetary policy makers cannot restore the original long-run equilibrium of the economy if, in the short run, the economy has moved to a point where inflation is above target inflation and
Will changes in technology affect the rate at which the short-run aggregate supply curve shifts in response to an output gap? Why or why not? Provide some specific examples of how technology will
*How could you use the aggregate demand-aggregate supply (AD/AS) framework to explain the impact of the financial crisis of 2007-2009 on inflation and output in the economy?
Display as a bar chart the periods since 1854 that are designated as U.S. recessions by the National Bureau of Economic Research (FRED code: USREC). Why has the frequency of recessions declined over
In the past, policymakers occasionally became aware of a recession only well after it began. Can they do better? Plot the probability of a recession from a statistical model (FRED code:
Compare the frequency and timing of recessions in key European economies since 1960. Make separate bar charts for Germany (FRED code: DEURECM), Italy (FRED code: ITARECM), and Spain (FRED code:
To keep inflation low and steady, central banks would like to keep output reasonably close to its potential level, but can they anticipate changes in potential GDP? Plot since 1960 the percent change
Explain in detail how monetary policy influences banks’ lending behavior. Show how an open market purchase affects the banking system’s balance sheet, and discuss the impact on the supply of
Explain why you might expect the recovery from the 2007-2009 recessions to be weaker than normal?
Explain why monetary policymakers’ actions in cutting the Federal Funds rate to almost zero were not sufficient to boost economic activity during the recession of 2007-2009.
When monetary policymakers hit the zero nominal-interest-rate bound with their policy rate, they have the option to turn to unconventional tools of monetary policy. How do these unconventional tools
The government decides to place limits on the interest rates banks can pay their depositors. Seeing that alternative investments pay higher interest rates, depositors withdraw their funds from banks
Describe the theory of the exchange-rate channel of the monetary transmission mechanism. How, through the exchange rate, does an interest rate increase influence output? Why is this link difficult
Many economists have argued that Japan’s economic problems during the 1990s were caused largely by bank failures and the failure of the Japanese government to clean up the banking system. Explain
Considering the impact of the U.S. house price bubble that led to the financial crisis of 2007-2009, how do you think monetary policymakers should respond to bubbles in asset markets?
For each of the following, explain whether the response is theoretically consistent with a tightening of monetary policy and identify which traditional channel of monetary policy is at work: a. Firms
Suppose there is an unexpected slowdown in the rate of productivity growth in the economy so that forecasters consistently overestimate the growth rate of GDP. If the central bank bases its policy
Suppose the policy interest rate controlled by the central bank and the inflation rate were both zero. Explain in terms of the aggregate demand-aggregate supply framework how the economy could fall
Use the aggregate demand-aggregate supply framework to show how a boom in equity prices might affect inflation and output in the short run. Describe the long-run impact on inflation and output: (a)
Explain why the traditional interest-rate channel of monetary policy transmission from monetary policy actions to changes in investment and consumption decisions may be relatively weak.
New developments in information technology have simplified the assessment of individual borrowers’ creditworthiness. What are the likely consequences for the structure of the financial system?
Why might the zero nominal-interest-rate bound lead policymakers to raise their inflation objective?
Consider a situation where central bank officials repeatedly express concern that output exceeds potential output, implying that the economy is overheating. Although they haven’t implemented any
Do you think the balance-sheet channel of monetary policy would be stronger or weaker if:a. Firms’ balance sheets in general are very healthy?b. Firms have a lot of existing variable-rate debt?
In the wake of the financial crisis of 2007-2009, would you anticipate the bank lending channel becoming more or less important in the U.S. in the near future? Explain your answer.
Compare the impact of a given change in monetary policy in two economies that are similar in every way except that, in Economy A, the financial system has a large shadow banking system providing many
In conducting monetary policy, the European Central Bank (ECB) must balance the needs of euro-area countries with differing economic conditions. Plot since 1990 the yield spread between government
How important is the balance sheet channel of monetary policy? Plot since 1996 the net tightening of credit standards for consumer and credit card loans (FRED code: DRTSCLC) and (on the right scale)
Among the challenges facing central banks around the world is the elevated level of public debt. Plot U.S. federal debt held by the public as a percent of gross domestic product (FRED code:
Some critics argue that the Federal Reserve stoked the housing price bubble after 2000 by keeping monetary policy too simulative. To investigate, first plot from 2000 to 2007 on a quarterly basis the
Explain the role of financial intermediaries in the flow of funds through the three-sector economy.
How would you define efficient security markets?
The efficient market hypothesis is interpreted in a weak form, a semistrong form, and a strong form. How can we differentiate its various forms?
In what way is an investment banker a risk taker?
What is the purpose of market stabilization activities during the distribution process?
Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.
How does a leveraged buyout work? What does the debt structure of the firm normally look like after a leveraged buyout? What might be done to reduce the debt?
What is privatization?
What is shelf registration? How does it differ from the traditional requirements for security offerings?
Discuss the benefits accruing to a company that is traded in the public securities markets.
What are the disadvantages to being public?
Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million
The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,910,000 in the current year. The company is considering the issuance of 1 million additional
American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000
American Health Systems has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares,
Jordan Broadcasting Company is going public at $50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering,
Solar Energy Corp. has $4 million in earnings with four million shares outstanding. Investment bankers think the stock can justify a P/E ratio of 21. Assume the underwriting spread is 5 percent. What
Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of

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