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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

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 λ = 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 λ = 0.5 r = 2a. Derive
Suppose the monetary policy curve is given by r = 1.5 + 0.75π, 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
Assume that the monetary policy curve is given by T1.5+0.75. a. Calculate the real interest rate when the inflation rate is 2%, 3%, and 4%. b. Draw a graph of the MP curve, labelling the points from
“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?
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 financial frictionsb. An increase in taxes and an autonomous easing of monetary
If an asset-price bubble begins to form, assuming the central bank responds, how is it likely to respond, and what will be the effect on the MP 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
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?
If what does this imply about the relationship between the nominal interest rate and the inflation rate?
What is the key assumption underlying the Bank of Canada’s ability to control the real interest rate?
The Office of Financial Research is a division of the U.S. Treasury department that monitors conditions in the financial sector and broader economy. Go to their webpage at
Write a short essay about dampening and amplifying mechanisms in the business cycle.Can you relate that section to the IS curve that you studied in this book?Source: “Think Again: The Teaching of
A recent article in The Economist criticizes the current economics curriculum in universities and mentions that a group of economists are developing a new curriculum to help students better
Go to the CANSIM database, locate Table 228-0069, and find data on Canadian merchandise exports to the United States(V87008956) and Canadian merchandise imports from the United States (V87008840).a.
Go to the CANSIM database, find Table 3800067, and find data on household final consumption expenditure (series V61989012), household consumption expenditure on goods (series V61989013), household
Consider an economy described by the following data: C = $4 trillion = $1.5 trillion I 27 G = $3.0 trillion T=$3.0 trillion = $1.0 trillion NX = F = 0 mpc = 0.8 d = 0.35 x 0.15
Consider an economy described by the following data:a. Derive simplified expressions for the consumption function, the investment function, and the net export function.b. Derive an expression for the
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 will happen to aggregate output if
Suppose that Dell Corporation has 20 000 computers in its warehouses on December 31, 2019, ready to be shipped to merchants (each computer is valued at $500). By December 31, 2020, Dell Corporation
Calculate the value of the consumption function at each level of income in the following table if autonomous consumption = = 300, taxes 200, and mpc = 0.9. Disposable Income Y Income T Consumption C
Suppose you read that prospects for stronger future economic growth have led the Canadian dollar to strengthen and stock prices to increase.a. What effect does the strengthened dollar have on the IS
When the Bank of Canada reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
“Financial frictions are not a problem for the economy, since they do not affect the safe policy rate, which is controlled by the central bank.” Is this statement true, false, or uncertain?
In each of the following cases, 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
Inventories typically increase starting at the beginning of recessions and begin to decline near the end of recessions. What does this say about the relationship between planned spending and
If a change in the real interest rate has no effect on planned investment spending or net exports, what does this imply about the slope of the IS curve?
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
Wikipedia has a detailed account of hyperinflationary episodes in a number of countries throughout history. Go to en.wikipedia.org/wiki/Hyperinflation#Notable_hyperinflationary_episodes . Which of
Irving Fisher developed the clearest exposition of the classical quantity theory of money. Go to en.wikipedia.org/wiki/Irving_Fisher, and write a one-page summary of his life and contributions.
Use the data from the previous exercise, and also download the three-month T-bill rate (CANSIM series V122531). Run a regression of real money balances on a constant, real GDP, and the nominal
The formula for computing the velocity of money is Y/(M/P), where Y is real GDP, M is a money supply measure, and P is the price level. Go to the St. Louis FRED database, and download quarterly
Suppose the liquidity preference function is given byUse the money demand equation, along with the following table of values, to calculate the velocity for each period. Y L(i, Y): 1000i 8
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 dollars):Calculate the velocity for each
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 conclusion affected monetary
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 does the portfolio choice approach
Consider the portfolio choice theory of money demand. How do you think the demand for money would 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 had 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 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, etc.)
Some payment technologies require infrastructure (e.g., merchants need to have access to credit card swiping machines).In most developing countries, historically this infrastructure has either been
Consider two central banks: one with a history of maintaining price stability and low inflation and the other with a history of high inflation and poor inflation management. All else equal, if the
What trend is apparent about the length of recessions?
Go to www.econlib.org/library/Enc1/Recessions.html and review the material reported on recessions.a. What is the formal definition of a recession?b. What are the problems with the definition?c. What
Figure 1 shows the relationship between estimated real interest rates and nominal interest rates. Go to www.martincapital.com/ and click on ”U.S. Financial Data” and then “U.S. Financial
Suppose the economy is in recession, and monetary policymakers lower interest rates to stabilize the economy.Use an aggregate supply and demand diagram to demonstrate the effects of a monetary easing
“A decrease in short-term nominal interest rates necessarily implies a stance of monetary easing.” Is this statement true, false, or uncertain? Explain your answer.
What evidence exists to support the credit view of 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,
How are the wealth effect and household liquidity effect similar? How are they different?
How does the Great Depression demonstrate the unanticipated price level channel?
If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?
One of the classic features of the global financial crisis is the failure of high-profile investment banks and financial firms, such as Lehman Brothers, Bear Stearns, and AIG. These firms experienced
Why might the bank lending channel be less effective than it once was?
Why does the credit view imply that monetary policy has a greater effect on small businesses rather than large firms?
During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks’excess reserves increased sharply, while credit extended to households and firms
During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At the same time, the stock market fell dramatically and housing market values declined sharply.
In the late 1990s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy
Economist Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.
From mid-2008 to early 2009, the Dow Jones Industrial Average declined by approximately 50%, while real interest rates were low or were falling.What does this suggest would have happened to
Predict what will happen to stock prices after a monetary easing. Explain your prediction.
“The costs of financing investment are related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates.” Is
In the 2007–2009 recession, the value of common stocks in real terms fell by 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity of
“If countries fix their exchange rate, the exchange rate channel of monetary policy does not exist.” Is this statement true, false, or uncertain? Explain your answer.
Describe an advantage and a disadvantage to monetary policy of having so many different channels through which monetary policy can operate.
Lars Svensson, a deputy governor of the Swedish central bank, proclaimed that when an economy is at risk of falling into deflation, central bankers should be“responsibly irresponsible” with
How can the interest rate channel still function when short term nominal interest rates are at the zero lower bound?
“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 the U.S.”
In 2009, in the wake of the global financial crisis when interest rates were at their lowest, the U.S. government instituted a “cash for clunkers” program and later a“cash for appliances”
How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock? How does it help if a negative aggregate supply shock occurs? Use graphs of
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
Suppose the central bank is following a constant money growth rule, and the economy is hit with a severe economic downturn. Use an aggregate supply and demand graph to show what the possible effects
What does it mean to be a “conservative” central banker?
How can establishing an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?
What are the purposes of inflation targeting and how does this monetary policy strategy achieve them?
Suppose the statistical office of a country does a poor job in measuring inflation and reports an annualized inflation rate of 4% for a few months, while the true inflation rate has been around 2.5%.
Central banks that engage in inflation targeting usually announce the inflation target and time period for which that target will be relevant. In addition, central bank officials are held accountable
Why did the oil price shocks of the 1970s affect the economy differently than the oil price shocks in 2007?
“The more credible the policymakers who pursue an anti-inflation policy, the more successful that policy will be.” Is this statement true, false, or uncertain?Explain your answer.
As part of its response to the global financial crisis, the Fed lowered the federal funds rate target to nearly zero by December 2008 and nearly tripled the monetary base between 2008 and 2011, a
In general, how does credibility (or lack thereof) affect the aggregate supply curve?
How is constrained discretion different from discretion in monetary policy? How are the outcomes likely to be different?
How does the case of Switzerland’s monetary targeting strategy demonstrate the case against monetary policy rules?
What are the benefits and costs of sticking to a set of rules in each of the following cases? How do each of these situations relate to the conduct of economic policy?a. Going on a diet.b. Raising
In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the
Many economists are worried that a high level of budget deficits may lead to inflationary monetary policies in the future. Could these budget deficits have an effect on the current rate of inflation?
If, in a surprise victory, a new administration is elected to office that the public believes will pursue inflationary policy, predict what might happen to the level of output and inflation even
What are the arguments for and against policy rules?
In what sense can greater central bank independence make the time-inconsistency problem worse?
If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 12%, but the Fed does not go through with this policy change, what will happen to
Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Federal Reserve increases the federal funds rate.Assume that the Federal Reserve is
“The Lucas critique by itself casts doubt on the ability of discretionary stabilization policy to be beneficial.”Is this statement true, false, or uncertain? Explain your answer.

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