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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

If expected inflation drops in Europe so that interest rates fall there, what will happen to the exchange rate for the Canadian dollar?
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
In 1999, the euro was trading at US $0.90 per euro.If the euro is now trading at US $1.16 per euro, what is the percentage change in the euro’s value? Is this an appreciation or depreciation?
The New Zealand dollar to U.S. dollar exchange rate is 1.36, and the British pound to U.S. dollar exchange rate is 0.62. If you find that the British pound to New Zealand dollar were trading at 0.49,
If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.62, what must the Canadian dollar to British pound exchange rate be?
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 September 2012, the Federal Reserve announced a large-scale asset-purchase program (known as QE3)designed to lower intermediate and longer-term interest rates. What effect should this have had on
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.
If Mexicans go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the Mexican peso?
If Canadian auto companies make a breakthrough in automobile technology and are able to produce a car that gets 50 kilometres to the litre, what will happen to the Canadian exchange rate?
If nominal interest rates in Canada rise but real interest rates fall, predict what will happen to the Canadian exchange rate.
If the Indian government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
If the British central bank lowers interest rates to reduce unemployment, what will happen to the value of the pound in the short run and the long run?
Suppose the governor of the Bank of Canada announces a new set of reforms which includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the
In the mid- to late 1970s, the yen appreciated relative to the U.S. dollar even though Japan’s inflation rate was higher than the inflation rate in the United States. How can this be explained by
From 2009 to 2011, the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same time, many countries in the euro area were hit hard with
When the Bank of Canada conducts an expansionary monetary policy, what happens to the money supply?How does this affect the supply of dollar assets?
If the demand for a country’s exports falls at the same time that tariffs on imports are raised, will the country’s currency tend to appreciate or depreciate in the long run?
If the Japanese price level rises by 5% relative to the price level in Canada, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of
When the Canadian dollar depreciates, what happens to exports and imports in Canada?
“A country is always worse off when its currency is weak (falls in value).” Is this statement true, false, or uncertain? Explain your answer.
When the euro appreciates, are you more likely to drink Canadian or French wine?
Since monetary policy changes through the overnight interest rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected
If the Bank of Canada has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply? Use a graph of the market for reserves to explain.
What does the Taylor rule imply that policymakers should do to the overnight interest rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the
How can bank behaviour and the Bank of Canada’s behaviour cause money supply growth to be procyclical(rising in booms and falling in recessions)?
“Interest rates can be measured more accurately and quickly than reserve aggregates; hence an interest rate is preferred to the reserve aggregates as a policy instrument.”Do you agree or
Compare the monetary base to M11 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?
What procedures can the Bank of Canada use to control the overnight interest rate? Why does control of this interest rate imply that the Bank of Canada will lose control of nonborrowed reserves?
“If the demand for reserves did not fluctuate, the Bank of Canada could pursue both a reserves target and an interest-rate target at the same time.” Is this statement true, false, or uncertain?
Classify each of the following as either a policy instrument or an intermediate target, and explain why.a. The 10-year Canada bond rateb. The monetary basec. M11d. The overnight interest rate
Under what conditions might a central bank respond to a perceived stock market bubble?
Why would it be better to lean against credit-driven bubbles rather than just clean up after them like other types of burst asset bubbles?
Why aren’t most central banks more proactive at trying to use monetary policy to eliminate asset-price bubbles?
If higher inflation is bad, then why might it be advantageous to have a higher inflation target, rather than a lower target closer to zero?
“The zero lower bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer-term interest rates instead.” Is this
What are the key advantages and disadvantages of the monetary strategy recently used at the Federal Reserve in which the nominal anchor is only implicit?
“Because inflation targeting focuses on achieving the inflation target, it will lead to excessive output fluctuations.”Is this statement true, false, or uncertain?Explain.
Why might inflation targeting increase support for the independence of the central bank to conduct monetary policy?
What methods have inflation-targeting central banks used to increase communication with the public and increase the transparency of monetary policy making?
How does inflation targeting help reduce the timeinconsistency of discretionary policy?
Why is a public announcement of numerical inflation rate objectives important to the success of an inflationtargeting central bank?
“A central bank with a dual mandate will achieve lower unemployment in the long run than a central bank with a hierarchical mandate in which price stability takes precedence.” Is this statement
“Since financial crises can impart severe damage to the economy, a central bank’s primary goal should be to ensure stability in financial markets.” Is this statement true, false, or uncertain?
Why would it be problematic for a central bank to have a primary goal of maximizing economic growth?
What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing overly expansionary monetary policy?
What are the benefits of using a nominal anchor for the conduct of monetary policy?
Using the supply and demand analysis of the market for reserves in the United States, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything
If a switch occurs from deposits into currency, what happens to the overnight interest rate? Use the supply and demand analysis of the market for reserves to explain your answer.
What is the main advantage and the main disadvantage of an unconditional policy commitment?
Why is the composition of the central bank’s balance sheet a potentially important aspect of monetary policy during an economic crisis?
What are the advantages and disadvantages of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower bound?
Following the global fi nancial crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion by 2011. Many
Compare the use of open market operations and government deposit shifting to control the money supply, using the following criteria: fl exibility, reversibility, eff ectiveness, and speed of
“The channel/corridor system for setting interest rates enables the Bank of Canada to set the overnight rate whatever the demand for reserves, including zero demand.” Discuss.
Explain how SPRAs and SRAs aff ect the overnight rate.
How can the procyclical movement of interest rates (rising during business cycle expansions and falling during business cycle contractions) lead to a procyclical movement in the money supply as a
You often read in the newspaper that the Bank of Canada has just lowered the target overnight rate. Does this signal that the Bank is moving to a more expansionary monetary policy? Why or why not?
The benefi ts of using last-resort lending to prevent bank panics are straightforward. What are the costs?
“Last-resort lending is no longer needed because the presence of the CDIC eliminates the possibility of bank panics.” Is this statement true, false, or uncertain?
Discuss how the operating band aff ects interest rates and the money supply in the economy.
If the Bank of Canada did not administer the operating band, what do you predict would happen to the money supply if the bank rate were several percentage points below the overnight rate?
“The only way that the Bank of Canada can aff ect the level of advances is by adjusting the bank rate.” Is this statement true, false, or uncertain? Explain your answer.
Most open market operations are currently repurchase agreements. What does this tell us about the likely volume of open market operations relative to dynamic open market operations?
“In the LVTS environment, government deposit shifting is aff ected by auctions of government balances.”Discuss.
If the government has just paid for major computer upgrades and as a result its deposits with the Bank of Canada fall, what open market operations could be undertaken?
During the holiday season, when the public’s holdings of currency increase, what open market operations typically occur? Why?
If government deposits at the Bank of Canada are predicted to increase, what open market operations could be undertaken to neutralize the eff ect on settlement balances?
Suppose that currency in circulation is $600 billion, the amount of chequable deposits is $900 billion, excess reserves are $15 billion, and the desired ratio is 10%.a. Calculate the money supply,
If the Bank of Canada sells $1 million of bonds and banks reduce their borrowings from the Bank of Canada by $1 million, predict what will happen to the money supply.
If the Bank of Canada reduces reserves by selling$5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will
If reserves in the banking system increase by $1 billion as a result of Bank of Canada lending to fi nancial institutions of $1 billion, and chequable deposits increase by $9 billion, why isn’t the
If the Bank of Canada buys $1 million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in chequable deposits? ( Hint:
Using T-accounts, show what happens to chequable deposits in the banking system when the Bank of Canada sells $2 million of bonds to the First National Bank.
Using T-accounts, show what happens to chequable deposits in the banking system when the Bank of Canada lends an additional $1 million to the First National Bank.
If the Bank of Canada lends fi ve banks a total of$100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts to explain
If the Bank of Canada sells $2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase fi lled with currency, what happens to reserves and the monetary base? Use T-accounts
If the Bank of Canada sells $2 million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
The money multiplier declined signifi cantly during the period 1930–1933 and also during the recent fi nancial crisis of 2008–2010. Yet the M1 money supply decreased by 25% in the Depression
In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this aff ect the multiplier process and the money supply in the United
During the Great Depression years from 1930 to 1933, both the currency ratio c and the excess reserves ratio e rose dramatically in the United States. What eff ect did these factors have on the money
What eff ect might a fi nancial panic have on the money multiplier and the money supply? Why?
“The money multiplier is necessarily greater than 1.” Is this statement true, false, or uncertain? Explain your answer.
Describe how each of the following can aff ect the money supply: (a) the central bank; (b) banks; and(c) depositors.
The Bank of Canada buys $100 million of bonds from the public and there is also a decline in the desired reserve ratio. What will happen to the money supply?
“The Bank of Canada can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base.” Is this statement true, false, or uncertain? Explain.
“The Bank of Canada can perfectly control the amount of reserves in the system.” Is this statement true, false, or uncertain? Explain.
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what eff ect will this have on chequable deposits in the banking system if the rest of the public
If a bank sells $10 million of bonds to the Bank of Canada to pay back $10 million on the loan it owes, what will be the eff ect on the level of chequable deposits?
If a bank depositor withdraws $1000 of currency from an account, what happens to reserves, chequable deposits, and the monetary base?
Suppose that the Bank of Canada buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities
The First National Bank receives an extra $100 of reserves but decides not to lend out any of these reserves. How much deposit creation takes place for the entire banking system?
Classify each of these transactions as either an asset, a liability, or neither, for each of the “players” in the money supply process—the Bank of Canada, banks, and depositors.a. You get a $10
Why did the Bank of England up until 1997 have a low degree of independence?
Which is more independent, the Federal Reserve or the European Central Bank? Why?
The Fed promotes secrecy by not releasing the minutes of FOMC meetings to Congress or the public immediately. Discuss the arguments for and against this policy.
Should the Federal Reserve be subject to periodic auditing of its policies, procedures, and fi nances?Why or why not?
What is the primary tool that the U.S. Congress uses to exercise control over the Fed?
Why did Canada show little interest in the establishment of a central bank during the fi rst 60 or so years of Confederation?
“The independence of the Bank of Canada has meant that it takes the long view and not the short view.” Is this statement true, false, or uncertain? Explain your answer.

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