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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

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 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, etc.)
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
The use of some payment technologies requires some infrastructure (e.g., merchants need to have access to credit card swiping machines). In most developing countries, this infrastructure is either
Suppose a new “payment technology” allows individuals to make payments using U.S. Treasury bonds (i.e., U.S.Treasury bonds are immediately cashed when needed to make a payment and that balance is
“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 congressional 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 chose to peg the peso to the U.S. dollar and commit to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and
Suppose the Federal Reserve purchases $1,000,000 worth of foreign assets.a. If the Federal Reserve purchases the foreign assets with $1,000,000 in currency, show the effect 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 when German reunification occurred?
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
“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 meant that countries have pursued 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 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 the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help
Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy?
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 for the Netherlands?
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 Federal Reserve 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 Federal Reserve 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,
International travelers and business people frequently need to accurately convert from one currency to another. It is often easy to find the rate needed to convert the U.S. dollar into another
The Federal Reserve maintains a website that lists the exchange rates between the U.S. dollar and many other currencies. Go to www.newyorkfed.org/markets/foreignex.html. Go to the historical data
If a strike takes place in France, making it harder to buy French goods, what will happen to the value of the U.S. dollar?
If the European central bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the U.S. dollar?
If expected inflation drops in Europe, so that interest rates fall there, what will happen to the exchange rate for the U.S. dollar?
If the price level recently increased by 20% in England while falling by 5% in the United States, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.55
The Mexican peso is trading at 10 pesos per dollar.If the expected U.S. inflation rate is 2% while the expected Mexican inflation rate is 23% over the next year, given PPP, what is the expected
In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at $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 be the Canadian dollar to British pound exchange rate?
A German sports car is selling for 70,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.90 euro 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 dollar/euro exchange rate?
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 American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the gallon, what will happen to the U.S. exchange rate?
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S.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 president of the United States announces a new set of reforms that 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 dollar, even though Japan’s inflation rate was higher than America’s. How can this be explained by an improvement in the
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 Federal Reserve 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 the United States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms
When the U.S. dollar depreciates, what happens to exports and imports in the United States?
“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 California or French wine?
Many countries have central banks that are responsible for their nation’s monetary policy. Go to www.bis.org/cbanks.htm and select one of the central banks (for example, Norway). Review that
It is possible to access other central bank websites to learn about their structure. One example is the European Central bank. Go to www.ecb.int/index.html. On the ECB home page, find information
The Federal Open Market Committee (FOMC)meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are
Since monetary policy changes through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected inflation
If the Fed 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 fed funds rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the inflation
How can bank behavior and the Fed’s behavior 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 M1 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?
What procedures can the Fed use to control the federal funds rate? Why does control of this interest rate imply that the Fed will lose control of nonborrowed reserves?
“If the demand for reserves did not fluctuate, the Fed could pursue both a reserves target and an interest-rate target at the same time.” Is this statement true, false, or uncertain? Explain.
Classify each of the following as either a policy instrument or an intermediate target, and explain why.a. The ten-year Treasury bond rateb. The monetary basec. M1d. The fed funds rate
According to the Greenspan Doctrine, 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 and clean after other types of asset bubbles crash?
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 longerterm interest rates instead.” Is this
What are the key advantages and disadvantages of the monetary strategy used at the Federal Reserve under Alan Greenspan and Ben Bernanke 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?
Go to www.federalreserve.gov/releases/h15/update/.What is the current federal funds rate? What is the current Federal Reserve discount rate (define this rate as well)? Have short-term rates increased
Go to www.federalreserve.gov/fomc/. This site reports activity by the FOMC. Scroll down to Calendar and click on the statement released after the last meeting.Summarize this statement in one
Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under
Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves?Use the supply and demand analysis of the market for reserves to explain.
If a switch occurs from deposits into currency, what happens to the federal funds rate? Use the supply and demand analysis of the market for reserves to explain your answer.
What is the main advantage and disadvantage of an unconditional policy commitment?

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