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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

What are the real interest rate and the equilibrium level of output?c. Suppose government spending increases to $4 trillion.What happens to equilibrium output?d. If the Bank of Canada wants to keep
Consider the economy described in Applied Problem 23.a. Derive expressions for the MP curve and the AD curve.b. Assume that p =
Calculate the real interest rate, the equilibrium level of output, consumption, planned investment, and net exports.c. Suppose the Bank of Canada increases r to r = 2.Calculate the real interest
Consider an economy described by the following:C = $3.25 trillion I = $1.3 trillion G = $3.5 trillion T = $3.0 trillion NX = -$1.0 trillion f = 1 mpc = 0.75 d = 0.3 x = 0.1 l =1 r = 1a. Derive
Consider an economy described by the following:C = $4 trillion I = $1.5 trillion G = $3.0 trillion T = $3.0 trillion NX = $1.0 trillion f = 0 mpc = 0.8 d = 0.35 x = 0.15 l = 0.5 r = 2a. Derive
Suppose the monetary policy curve is given by r = 1.5 + 0.75p, and the IS curve is given by Y = 13 - r.a. Calculate an expression for the aggregate demand curve.b. Calculate the real interest rate
Use an IS curve and an MP curve to derive graphically the AD curve.
Assume that the monetary policy curve is given by r = 1.5 + 0.75p.a. Calculate the real interest rate when the infl ation rate is 2%, 3%, and 4%.b. Draw a graph of the MP curve, labelling the points
“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
Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?
If government spending increases and taxes are raised to keep the budget balanced, what happens to the aggregate demand curve?
Why does the aggregate demand curve shift when “animal spirits” change?
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.
For each of the following situations, describe how (if at all) the IS , MP , and AD curves are affected.a. A decrease in fi nancial frictionsb. 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?
If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output?
“Autonomous monetary policy is more effective at changing output when l is higher.” Is this statement true, false, or uncertain? Explain your answer.
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 action demonstrated a violation of the Taylor principle.” Is this statement true,
Suppose that a new Bank of Canada governor is appointed and that his or her approach to monetary policy can be summarized by the following statement:“I care only about increasing employment.
How is an autonomous tightening or easing of monetary policy different from a change in the real interest rate caused by a change in the current inflation rate?
How does an autonomous tightening or easing of monetary policy by the Bank of Canada affect the MP curve?
If l = 0, what does this imply about the relationship between the nominal interest rate and the inflation rate?
Why does the MP curve necessarily have an upward slope?
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?
What will happen to equilibrium output? If the central bank can set the interest rate, then at what level should the interest rate be set to keep output from changing?d. Suppose the fi nancial crisis
What is the equilibrium level of output?c. Suppose that a fi nancial crisis begins, and f increases to f =
Consider an economy described by the following data:C = $4 trillion I = $1.5 trillion G = $3.0 trillion T = $3.0 trillion NX = $1.0 trillion f = 0 mpc = 0.8 d = 0.35 x = 0.15a. Calculate an
Consider an economy described by the following data:C = $3.25 trillion I = $1.3 trillion G = $3.5 trillion T = $3.0 trillion NX = - $1.0 trillion f = 1 mpc = 0.75 d = 0.3 x = 0.1a. Calculate simplifi
Assuming both taxes and government spending increase by the same amount, derive an expression for the effect on equilibrium output.
If the marginal propensity to consume is 0.75, by how much would government spending have to rise to increase output by $1000 billion? By how much would taxes need to decrease to increase output
If the consumption function is C 5 100 1 0.75 Y D , I 5 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output?What will happen to aggregate output if
Suppose that Dell Corporation has 20 000 computers in its warehouses on December 31, 2016, ready to be shipped to merchants (each computer is valued at $500). By December 31, 2017, Dell Corporation
Assume that autonomous consumption is $1625 billion and disposable income is $11 500 billion. Calculate consumption expenditure if an increase of $1000 in disposable income leads to an increase of
Calculate the value of the consumption function at each level of income in the table below if autonomous consumption 5 300, taxes 5 200, and mpc 5 0.9.
Suppose you read that prospects for stronger future economic growth have led the dollar to strengthen and stock prices to increase.a. What effect does the strengthened dollar have on the IS curve?b.
When the central bank reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
“The fiscal stimulus package of 2009 caused the IS curve to shift to the left, since output decreased and unemployment increased after the policies were implemented.”Is this statement true,
In each of the cases below, determine 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.
Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn’t cut production, what effect would this have on their profits? Why?
If a change in the interest rate has no effect on planned investment spending or net exports, what does this imply about the slope of the IS curve?
If an increase in autonomous consumer expenditure is matched by an equal increase in taxes, will aggregate output rise or fall?
In each of the cases below, what happens to equilibrium output? Briefly explain how it affects the relevant component(s) of planned spending.a. The real interest rate rises.b. The marginal propensity
If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by $100 billion, while consumers become more pessimistic and autonomous consumer
Why does equilibrium output increase as the marginal propensity to consume increases?
Why do increases in the real interest rate lead to decreases in net exports, and vice versa?
If households and firms believe the economy will be in a recession in the future, will this necessarily cause a recession, or have any impact on output at all?
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
“Since inventories can be costly to hold, firms’ planned inventory investment should be zero, and firms should acquire inventory only through unplanned inventory accumulation.” Is this
Why is inventory investment counted as part of aggregate spending if it isn’t actually sold to the final end user?
“When the stock market rises, investment spending is increasing.” Is this statement true, false, or uncertain?Explain your answer.
Suppose that a plot of the values of the money supply, M , and nominal GDP for a given country over 40 years shows that these two variables are very closely related. In particular, a plot of their
What evidence is used to assess the stability of the money demand function? What does the evidence suggest about the stability of money demand and how has this affected monetary policy making?
Why does the Keynesian view of the demand for money suggest that velocity is unpredictable?
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 also fall.Why would the portfolio choice
Consider the portfolio choice theory of money demand.How do you think the demand for money will be affected during a hyperinflation (i.e., monthly inflation rates in excess of 50%)?
Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade has been relatively high and quite unpredictable. Explain
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
According to the portfolio theories of money demand, what are the four factors that determine money demand? What changes in these factors can increase the demand for money?
Why is Keynes’s analysis of the speculative demand for money important to his view that velocity will undergo substantial fluctuations and thus cannot be treated as constant?
In Keynes’s analysis of the speculative demand for money, what will happen to money demand if people suddenly decide that the normal level of the interest rate has declined? Why?
In many countries, people hold money as a cushion against unexpected needs arising from a variety of potential scenarios (e.g., banking crises, natural disasters, health problems, unemployment) that
What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? On the basis of these motives, what variables did he think
Some payment technologies require infrastructure(e.g., merchants need to have access to credit card swiping machines). In most developing countries, this infrastructure is either nonexistent or very
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
“Persistent budget deficits always lead to higher inflation.”Is this statement true, false, or uncertain? Explain your answer.
Why would a central bank be concerned about persistent long-term budget deficits?
“If nominal GDP rises, velocity must rise.” Is this statement true, false, or uncertain? Explain your answer.
If credit cards were made illegal by government legislation, what would happen to velocity? Explain your answer.
If velocity and aggregate output are reasonably constant(as the classical economists believed), what happens to the price level when the money supply increases from$1 trillion to $4 trillion?
How would you expect velocity to typically behave over the business cycle?
Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and
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 eff ect of this open market
What are the advantages and disadvantages of currency boards and dollarization over a monetary policy that uses only an exchange-rate target?
When is exchange-rate targeting likely to be a sensible strategy for industrialized countries? When is exchange-rate targeting likely to be a sensible strategy for emerging market countries?
What are the key advantages of exchange-rate targeting as a monetary policy strategy?
How can persistent U.S. balance-of-payments deficits stimulate world inflation?
“Balance-of-payments deficits always cause a country to lose international reserves.” Is this statement true, false, or uncertain? Explain your answer.
How can the long-term bond market help reduce the time-inconsistency problem for monetary policy? Can the foreign exchange market also perform this role?
What are the advantages and disadvantages of having the IMF as an international lender of last resort?
How can exchange-rate targets lead to a speculative attack on a currency?
Why did the exchange-rate peg lead to difficulties for the countries in the ERM after the German reunification?
Why is it that in a pure, flexible exchange rate system, the foreign exchange market has no direct effect on the money supply? Does this mean that the foreign exchange market has no effect on
“If a country wants to keep its exchange rate from changing, it must give up some control over its money supply.” Is this statement true, false, or uncertain?Explain your answer.
“The abandonment of fixed exchange rates after 1973 has led countries to pursue more independent monetary policies.” Is this statement true, false, or uncertain?Explain your answer.
If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country’s central bank be forced to undertake, and what
What are some of the disadvantages of China’s pegging the yuan to the U.S. dollar?
“Inflation is not possible under the gold standard.” Is this statement true, false, or uncertain? Explain your answer.
What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/20 ounce of gold and one Swiss franc is convertible into 1/40 ounce of gold?
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
Why can balance-of-payments deficits force some countries to implement contractionary monetary policies?
How can a large balance-of-payments surplus contribute to a country’s inflation rate?
Why does a balance-of-payments deficit for the United States have a different effect on its international reserves than a balance-of-payments deficit does on the Netherlands?
For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account, capital account, or net change in international reserves) and
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,
If there is a strike in France, making it harder to buy French goods, what will happen to the value of the Canadian dollar?
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?

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