Questions and Answers of Economics Money Banking

Go to www.fdic.gov/regulations/laws/important/. This site reports on the most significant pieces of legislation affecting U.S. banks since the 1800s. Summarize the most recently enacted bank
Go to www.cdic.ca and click on “International Work.” Write an essay summarizing how globalization and international financial integration affect Canada’s financial sector safety net.
One of the countries hardest hit by the global financial crisis of 2008 was Iceland. Go to http://assets.opencrs. com/rpts/RS22988_20081120.pdf and summarize the causes and events that led to the
Go to the International Monetary Fund’s Financial Crisis page at ww.imf.org/external/np/exr/key/finstab. htm. Report on the most recent three countries that the IMF has given emergency loans in
This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was the
In this chapter we discuss the lemons problem and its effect on the efficient functioning of a market. This theory was initially developed by George Akerlof. Go to
The Internet is a great source of information on stock prices and stock price movements. Yahoo! Finance is a great source for stock market data. Go to http:// finance.yahoo.com and click on “DOW”
Visit www.forecasts.org/data/index.htm. Click on “Stock Index Data” at the very top of the page. Now choose “U.S. Stock Indices—Monthly.” Review the indexes for the DJIA, the S&P 500,
Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example, Vanguard (a U.S. company) carefully explains
Go to www.bloomberg.com and click on “Market Data” and then “Rates & Bonds” to find information about the yield curve in Australia, Brazil, Germany, Hong Kong, Japan, the United Kingdom,
One of the points made in this chapter is that inflation erodes investment returns. Go to www.money chimp.com/articles/econ/inflation_calculator.htm and review how changes in inflation alter your
Increasing prices erode the purchasing power of the dollar. It is interesting to calculate how much goods would have cost at some point in the past after adjusting for inflation.Click on
One of the largest single influences on the level of interest rates is inflation. There are a number of sites that report inflation over time. Go to www.bankofcanada.ca/rates/price-indexes/cpi and
Investigate the data on interest rates available from the Bank of Canada at www.bankofcanada.ca. Answer the following questions.a. What is the difference in the interest rates on 10-year and two-year
Go to www.bankofcanada.ca/rates/interest-rates and click on “Canadian bonds.”a. Compare the short-term nominal interest rate to the long-term nominal interest rate. Which is greater?b. Compare
Go to www.bankofcanada.ca and click on “Monetary Policy.” Select one policy on which the Bank of Canada has a written policy. Write a one-paragraph summary of this policy.
Go to www.bankofcanada.ca and click on “Rates and Statistics” and then “Summary of key monetary policy variables.”a. What has been the growth rate in M1+, M1++, and M2++ over the last 12
Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better off or worse off? Why?
How does the case of Japan support the “four lessons for monetary policy”?
Following the global financial crisis, mortgage rates reached record low levels in 2011.a. What effect should this have, according to the household liquidity effect channel?b. During the same time,
During and after the global financial crisis, the Bank of Canada provided banks with large amounts of liquidity. Banks’ excess reserves increased sharply, while credit extended to households and
During and after the global financial crisis, the Bank of Canada reduced the overnight interest rate to nearly zero. At the same time, the stock market fell dramatically and housing market values
From mid-2008 to early 2009, the S&P/TSX Industrial Average declined sharply, while real interest rates were low or were falling. What does this suggest would have happened to investment?
In the 2007–2009 recession, the value of common stocks in real terms fell almost 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity
In the 2007–2009 recession, the value of common stocks in real terms fell almost 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity
“Considering that consumption is nearly 2/3 of total GDP, this means that the interest rate, wealth, and household liquidity channels are the most important monetary policy channels in Canada.”
In 2009, in the wake of the global financial crisis when interest rates were at their lowest, the governments around the world instituted programs designed in part to stimulate new spending on
Suppose two countries have identical aggregate demand curves and potential levels of output, and g is the same. Assume that in 2013, both countries are hit with the same negative supply shock. Given
Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country affect the speed of adjustment of the
What does it mean to be a “conservative” central banker?
As part of its response to the global financial crisis, the Federal Reserve in the United States lowered the federal funds rate target to nearly zero by December 2008 and nearly tripled the monetary
In some countries, the government chooses the head of the central bank. The same government can fire the head of the central bank and replace him at any time. Explain the implications of such a
If, in a surprise victory, a new parliament is elected that the public believes will pursue inflationary policy, predict what might happen to the level of output and inflation even before the new
If the public expects the Bank of Canada to pursue a policy that is likely to raise short-term interest rates permanently to 12%, but the Bank does not go through with this policy change, what will
Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Bank of Canada increases the overnight interest rate. Assume that the Bank is considering an
As monetary policymakers care more about inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve
Suppose the government decides to decrease government expenditures as a means to cut the existing government budget deficit.a. Using a graph of aggregate demand and supply, show what the effect would
“If the data and recognition lags could be reduced, activist policy would more likely be beneficial to the economy.” Is this statement true, false, or uncertain? Explain your answer.
If someone told you, “policymakers couldn’t vote themselves out of a phone booth,” what type of policy lag is he or she referring to?
“Policymakers would never respond by stabilizing a temporary positive supply shock.” Is this statement true, false, or uncertain? Explain your answer.
Suppose three economies are hit with the same negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country B, inflation
Why do negative supply shocks pose a dilemma for policymakers?
During the global financial crisis, how were central banks around the world able to help offset the sharp increase in financial frictions, without the ability to lower interest rates further? Did it
What does it mean for the inflation gap to be negative?
During the first half of 2010, Bank of Canada officials discussed the possibility of increasing interest rates as away of fighting potential increases in expected inflation. If the public came to
Classify each of the following as a supply or demand shock. Use a graph to show the effects on inflation and output in the short run and the long run.a. Financial frictions increase.b. Households and
Predict the effect of an increase in sales taxes on both the aggregate supply and demand curves, showing the effects on output and inflation. Use a graph of aggregate supply and demand to demonstrate.
Many of the resources devoted to the fiscal stimulus packages by governments around the world during the global financial crisis encouraged investment in research and development of new technologies
In what ways is the Bank of Canada disinflation considered a success? What are the negative aspects of it?
“The depreciation of the Canadian dollar from December 2008 to December 2009 had a positive effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain
Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.
Suppose the MP curve is given as r = 2 + π, and the IS curve is given as Y = 20 - 2r.a. Derive an expression for the AD curve, and draw a graph labelling points at π = 0, π = 4, and π = 8.b.
Consider the economy described in Applied Problem 23.a. Derive expressions for the MP curve and AD curve.b. Assume that π = 2. What is the real interest rate and equilibrium level of output?c.
Consider an economy described by the following:C̅ = 3.25 trillion I̅ = 1.3 trillionG̅ = 3.5 trillionT̅ = 3.0 trillionN̅X̅ = -1.0 trillionf̅ = 1mpc = 0.75d = 0.3x = 0.1l = 1r̅ = 1a.
Consider an economy described by the following:C̅ = 4 trillionI̅ = 1.5 trillionG̅ = 3.0 trillionT̅ = 3.0 trillionN̅X̅ = 1.0 trillionf̅ = 0mpc = 0.8d = 0.35x = 0.15λ = 0.5r̅ = 2a. Derive
Use an IS curve and an MP curve to derive graphically the AD curve.
“If f increases, then the Bank of Canada can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions.” Is this statement true, false, or
What would be the effect of an increase in Canadian net exports on the aggregate demand curve? Would an increase in net exports affect the monetary policy curve? Explain why or why not.
For each of the following, describe how (if at all), the IS curve, MP curve, and AD curves are affected.a. A decrease in financial frictions.b. An increase in taxes, and an autonomous easing of
How does an autonomous tightening or easing of monetary policy by the Bank of Canada affect the aggregate demand curve?
What factors affect the slope of the aggregate demand curve?
“The Bank of Canada decreased the overnight interest rate in late 2007, even though inflation was increasing. This demonstrates a violation of the Taylor principle.” Is this statement true,
Suppose that a new Bank of Canada governor is appointed, and his or her approach to monetary policy can be summarized by the following statement: “I care only about increasing employment; inflation
How does an autonomous tightening or easing of monetary policy by the Bank of Canada affect the MP curve?
What is the key assumption underlying the Bank of Canada's ability to control the real interest rate?
When the inflation rate increases, what happens to the overnight interest rate? Operationally, how does the Bank of Canada adjust the overnight interest rate?
Consider an economy described by the following:C̅ = $4 trillionI̅ = $1.5 trillionG̅ = $3.0 trillionT̅ = $3.0 trillionN̅X̅ = $1.0 trillionf̅ = 0mpc = 0.8d = 0.35x = 0.15a. Calculate an
Consider an economy described by the following:C̅ = $3.25 trillionI̅ = $1.3 trillionG̅ = $3.5 trillionT̅ = $3.0 trillionN̅X̅ = -$1.0 trillionf̅ = 1mpc = 0.75d = 0.3x = 0.1a. Calculate
Assuming both taxes and government spending increase by the same amount, calculate an expression for the effect on equilibrium output.
If the marginal propensity to consume is 0.75, how much would government spending have to rise to increase output by $1000 billion? How much will taxes need to decrease to increase output by $1000
If the consumption function is C = 100 + 0.75YD, I = 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output? What happens to aggregate output if
Suppose that Dell Corporation has 20 000 computers in its warehouses on December 31, 2012, ready to be shipped to merchants (each computer is valued at $500). By December 31, 2013, Dell Corporation
Calculate the value of the consumption function at each level of income in the table below if autonomous consumption = 300, taxes = 200, and mpc = 0.9. Disposable Income Yp Income Y Consumption C 100
In its February 18, 2010, edition, The Wall Street Journal stated, “ The dollar strengthened [. . .] and stocks [. . .] followed suit. The Dow industrials rose 40.43 points, or 0.4%.”a. What
When the central bank reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
In each of the cases below, explain whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.a. The real interest rate rises.b. The marginal
“Firms will increase production when planned investment is less than (actual) total investment.” Is this statement true, false, or uncertain? Explain your answer.
If a change in the interest rate has no effect on planned investment spending or net exports, then what does this imply about the slope of the IS curve?
During and in the aftermath of the financial crisis of 2007–2009, planned investment fell substantially, despite significant decreases in the real interest rate. What factors related to the planned
Both the portfolio choice and Keynes’s theories of the demand for money suggest that as the relative expected return on money falls, demand for it will fall. Why would the portfolio choice
Explain how the following events will affect the demand for money according to the portfolio theories of money demand:a. The economy experiences a business cycle contraction.b. Brokerage fees
Suppose a new “payment technology” allows individuals to make payments using Canada bonds (i.e., Canada bonds are immediately cashed when needed to make a payment and that balance is transferred
If credit cards were made illegal by government legislation, what would happen to velocity? Explain your answer.
Visit the website of the Bank of Canada at www.bankofcanada.ca. Click on “Rates and Statistics” and then “Exchange Rates.”a. What is the Canadian-dollar effective exchange rate index
Suppose the Bank of Canada purchases $1 000 000 worth of foreign assets.a. If the Bank of Canada purchases the foreign assets with $1 000 000 in currency, show the effect of this open market
What are the advantages and disadvantages of having the IMF as an international lender of last resort?
What are some of the disadvantages to China’s pegging of the yuan to the U.S. dollar?
Under the gold standard, if Britain became more productive relative to Canada, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a
For each of the following, identify in which part of the balance-of-payments account it appears (current account, capital account, or net change in international reserves) and whether it is a receipt
If the Bank of Canada buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?
If the Bank of Canada buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves,
Go to the CANSIM data available in the Student Resources section of your MyEconLab website and download monthly data from January 1974 to December 2011 on the Canadian-dollar-per-U.S.-dollar exchange
If there is a strike in France, making it harder to buy French goods, what will happen to the value of the Canadian dollar?Use a graph of the foreign exchange market for dollars to illustrate the
If the European central bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the Canadian dollar?Use a graph of the foreign exchange market
If expected inflation drops in Europe so that interest rates fall there, what will happen to the exchange rate for the Canadian dollar?Use a graph of the foreign exchange market for dollars to
If the price level recently increased by 20% in England while falling by 5% in Canada, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.55 pounds per
The Mexican peso is trading at 10 pesos per dollar. If the expected Canadian inflation rate is 2% while the expected Mexican inflation rate is 23% over the next year, given PPP, what is the expected
A German sports car is selling for 70 000 euros. What is the dollar price in Canada for the German car if the exchange rate is 0.90 euros per dollar?
In March 2009, the Federal Reserve announced a quantitative easing program designed to lower intermediate and longer-term interest rates. What effect should this have on the U.S. dollar/euro exchange
Through the summer and fall of 2008 as the global financial crisis began to take hold, international financial institutions and sovereign wealth funds significantly increased their purchases of U.S.

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