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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

Predict the effect of a national sales tax on both the aggregate supply and demand curves and on aggregate output and the price level.
Predict what will happen to aggregate output and the price level if the Bank of England increases the money supply at the same time that UK government implements an income tax cut.
‘An important difference between Keynesians and monetarists rests on how long they think the long run actually is.’ Is this statement true, false, or uncertain?Explain your answer.Using economic
Show how aggregate demand and supply analysis can explain why both aggregate output and the price level fell sharply when investment spending collapsed during the Great Depression.
When aggregate output is below the natural rate level, what will happen to the price level over time if the aggregate demand curve remains unchanged? Why?
If a pill were invented that made workers twice as productive but their wages did not change, what would happen to the position of the short-run aggregate supply curve?
If huge budget deficits cause the public to think that there will be higher inflation in the future, what is likely to happen to the short-run aggregate supply curve when budget deficits rise?
‘Profit-maximizing behaviour on the part of firms explains why the short-run aggregate supply curve is upward-sloping.’ Is this statement true, false, or uncertain?Explain your answer.
If the euro increases in value relative to foreign currencies so that foreign goods become cheaper in the euro area, what will happen to the position of the short-run aggregate supply curve? The
Suppose that government spending is raised at the same time that the money supply is lowered. What will happen to the position of the aggregate demand curve?
Consider a stylized monetary union made up of two countries, Italy and Germany. Suppose that Italy unilaterally decides to boost income by raising government spending. Using the ISLM model predict
Monetary policy in the euro area is controlled by the European Central Bank (ECB), but implemented in a decentralized manner by the individual national central banks. Consider a stylized monetary
In the ISLM model of this chapter, we treat the exchange rate as an exogenous factor affecting the competiveness level and the net exports of a country.However, both fiscal and monetary policies can
Predict what will happen to interest rates and aggregate output if a stock market crash causes autonomous consumer expenditure to fall.
How will an equal rise in government spending and taxes affect the position of the aggregate demand curve?
Evidence indicates that lately the demand for money has become quite unstable. Why is this finding important to central bankers?
Suppose that the central bank wants to keep interest rates from rising when the government sharply increases healthcare spending. How can the central bank do this?
‘German re-unification can be understood as a combination of expansionary fiscal and restrictive monetary policy and may lead to no effect on aggregate output and an increase of the interest
Suppose the central bank reduces the money supply while the government raises taxes. What do you think will happen to interest rates and aggregate output?
‘An excess demand for money resulting from a rise in the demand for money can be eliminated only by a rise in the interest rate.’ Is this statement true, false, or uncertain?Explain your answer.
What happens to the position of the LM curve if the central bank decides that it will decrease the money supply to fight inflation and if, at the same time, the demand for money falls?
Calculate the value of the consumption function at each level of disposable income in Table 20.1 if a = 100 and mpc = 0.9.
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?
Looking at Figure 19.1, when were the two largest falls in velocity? What do declines like this suggest about how velocity moves with the business cycle? Given the data in Figure 19.1, is it
If velocity and aggregate output remain constant at 5 and 1,000, respectively, what happens to the price level if the money supply declines from €400 billion to €300 billion?
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?
If credit cards were made illegal by legislation, what would happen to velocity? Explain your answer.
What happens to nominal GDP if the money supply grows by 20% but velocity declines by 30%?
Calculate what happens to nominal GDP if velocity remains constant at 5 and the money supply increases from€200 billion to €300 billion.
Suppose the money supply M has been growing at 10% per year, and nominal GDP PY has been growing at 20% per year. The data are as follows (in billions of euros):2010 2011 2012 M 100 110 121 PY 1,000
What are the main convergence criteria of the Maastricht Treaty?
What are the main benefits and costs of a monetary union? What are the main criteria for the optimality of a currency area?
What are the key advantages and disadvantages of dollarization over other forms of exchange-rate targeting?
What are the advantages and disadvantages of a currency board over a monetary policy that just uses an exchange-rate target?
When is exchange-rate targeting likely to be a sensible strategy for industrialized countries? When is exchangerate targeting likely to be a sensible strategy for emerging market countries?
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?
Why may the disadvantage of exchange-rate targeting of not having an independent monetary policy be less of an issue for emerging market countries than for industrialized countries?
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 when German reunification occurred?
What are the key advantages of exchange-rate targeting as a monetary policy strategy?
‘The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies.’ Is this statement true, false, or uncertain? Explain your answer.
Why is it that in a pure flexible exchange rate system, the foreign exchange market has no direct effects on the money supply? Does this mean that the foreign exchange market has no effect on
‘Inflation is not possible under the gold standard.’ Is this statement true, false, or uncertain? Explain your answer.
How can persistent US 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.
Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy?
‘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.
How can a large balance-of-payments surplus contribute to the country’s inflation rate?
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
Under the gold standard, if the UK became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help
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 for the Netherlands?
For each of the following, identify in which part of the UK Balance of Payments account it appears (current account, capital account or net change in international reserves) and whether it is a
If the ECB buys euros 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 ECB buys euros in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money
If there is a strike in France, making it harder to buy French goods, what will happen to the value of the euro?
If the European Central Bank decides to contract the money supply to fight inflation, what will happen to the value of the euro versus the US dollar?
If expected inflation drops in Europe, leading to a fall in interest rates, predict what will happen to the exchange rate for the US dollar.
If Mexicans go on a spending spree and buy twice as much French perfume, Japanese TVs, British sweaters, Swiss watches and Italian wine, what will happen to the value of the Mexican peso?
If American car companies make a breakthrough in automotive technology and are able to produce a car that gets 60 miles to the gallon, what will happen to the US exchange rate?
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the US 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 Bank of England prints money to reduce unemployment, what will happen to the value of the pound versus other countries in the short run and the long run?
The president of the European Central Bank announces that he will reduce inflation with a new anti-inflation programme. If the public believes him, predict what will happen to the trade-weighted Euro
In the mid-to-late 1970s, the yen appreciated relative to the dollar even though Japan’s inflation rate was higher than America’s. How can this be explained by an improvement in the productivity
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 US price level rises by 5% relative to the price level in Germany, what does the theory of purchasing power parity predict will happen to the value of the US dollar in terms of the euro?
In a newspaper, check the exchange rates for the foreign currencies listed in the ‘Following the financial news box’ on page 383. Which of these currencies have appreciated and which have
‘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, is an American more likely to drink Californian or French wine?
Explain why, according to the Taylor principle, the monetary authorities should raise nominal interest rates by more than the increase in the inflation rate.
What is the advantage that monetary targeting, inflation targeting, and a monetary strategy with an implicit, but not an explicit, nominal anchor have in common?
‘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
‘Because the public can see whether a central bank hits its monetary targets almost immediately, whereas it takes time before the public can see whether an inflation target is achieved, monetary
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 policymaking?
What is the big if necessary for the success of monetary targeting? Does the experience with monetary targeting suggest that the big if is a problem?
What are the advantages of monetary targeting as a strategy for the conduct of monetary policy?
What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing overly expansionary monetary policy?
Give an example of the time-inconsistency problem that you experience in your everyday life.
‘Interest rates can be measured more accurately and more quickly than reserve aggregates. Hence an interest rate is preferred over the reserve aggregates as a policy instrument.’Do you agree or
Compare the monetary base to M2 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?
What procedures can the central bank use to control the short-term interest rate? Why does control of this interest rate imply that the central bank will lose control of non-borrowed reserves?
If the central bank has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply?
‘If the demand for reserves did not fluctuate, the central bank could pursue both an aggregate 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 ten-year Treasury bond rate(b) The monetary base(c) M2
‘Unemployment is a bad thing, and the government should make every effort to eliminate it.’ Do you agree or disagree? Explain your answer.
Many commentators argue that the large increase in the amount of reserves which accompanied quantitative easing will have large inflationary effects. Can the central bank reduce this risk by changing
Compare the use of open market operations, lending facilities and changes in reserve requirements to control the money supply on the following criteria:flexibility, reversibility, effectiveness and
‘Considering that raising reserve requirements to 100%makes complete control of the money supply possible, the ECB should be authorized to raise reserve requirements to this level.’ Discuss.
‘If reserve requirements were eliminated, it would be harder to control interest rates.’ True, false, or uncertain?
The benefits of using marginal lending facilities(or discount operations) to prevent bank panics are straightforward. What are the costs?
During the recent financial crisis, the ECB narrowed the corridor of its standing facilities. Can you think of the main reason behind this action?
Using the supply and demand analysis of the market for reserves, show what happens to the overnight interest rate, holding everything else constant, if the economy is surprisingly strong, leading to
‘The only way that the central bank can affect the level of borrowed reserves is by adjusting the lending rate.’Is this statement true, false, or uncertain? Explain your answer.
During Christmas-time, when the public’s holdings of currency increase, what kind of open market operations are typically implemented by central banks? Why?
If the central bank sells €1 million of bonds and banks reduce their borrowings from the central bank by€1 million, predict what will happen to the money supply.
The central bank buys €100 million of bonds from the public and also lowers r. What will happen to the money supply?
Did central banks’ response to the global financial crisis of 2007–9 prove that they learned from the lessons of the Great Depression?Using economic analysis to predict the future
During the Great Depression years, 1930–3, the currency ratio c rose dramatically. What do you think happened to the money supply? Why?
If you decide to hold €100 less cash than usual and therefore deposit €100 in cash in the bank, what effect will this have on chequable deposits in the banking system if the rest of the public

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