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money banking financial markets

Questions and Answers of Money Banking Financial Markets

(a) How do considerations of income taxes affect the Fisher relationship? (Remember, income taxes are paid on interest income.) (b) How might this relationship partially explain the rising real
Some economists have suggested that prices are sticky, or slow to adjust, in the short run. In that case, any increase in money growth will first raise real GDP and nominal GDP but will not change
Our short-run empirical evidence suggests that increases in money growth do not affect the short-run inflation rate but do increase the growth in real output. Use aggregate demand and supply analysis
Show how aggregate supply and demand analysis can explain the empirical relationships between money growth and growth in real GDP, the price level, and nominal GDP seen over the most recent 12
13. Assume the U.S. government is concerned about the fact that net exports in the United States are negative. What types of policies could improve the balance of trade?
12. Suppose the government increases spend¬ ing and finances the spending by printing money. What are the short-run and long- run macroeconomic effects on (a) the in¬ terest rate, (b) the exchange
11. Suppose the government increases spend¬ ing and finances the spending by borrow¬ ing. What are the short-run and long-run macroeconomic effects on (a) the interest rate, (b) the exchange rate,
10.Suppose the government increases spend¬ ing and finances the spending by raising tariffs. What are the short-run and long- run macroeconomic effects assuming the tariff increase (a) affects only
9. Explain why the tariffs on imported raw materials will affect the positions of both short-run and long-run aggregate supply.
8. Explain why the exchange rate might af¬ fect the position of short-run aggregate supply. Under what conditions will changes in the exchange rate not affect short-run aggregate supply?
7. Holding everything else constant, deter¬ mine the short-run impact of the following on the equilibrium price level and real GDP:(a) . An increase in the exchange rate(b) . A decrease in the
6. Determine the impact of the following on aggregate demand:(a) . An increase in the foreign interest rate(b) . A decrease in the money supply(c) . An increase in tariffs on imported consumer
5. Determine the impact of the following on the demand for net exports:(a) . An increase in both the U.S. and for¬ eign interest rates(b) . An increase in both U.S. and foreign wealth
4. Determine the impact of the following on the demand for net exports: (a). An increase in the U.S. interest rate (b). An increase in the foreign price level (c). An increased taste for U.S. goods
3. Determine the impact of the following on the demand for imports:(a) . An increase in the U.S. price level(b) . An increase in the foreign price level(c) . A decrease in the exchange rate
2. Explain why net exports can be positive or negative and why a higher (U.S.) price level results in a reduction in the quantity demanded of net exports.
1. Suppose a U.S. resident buys a case of French wine for $1,000. The owner of the French vineyard uses this money to buy $1,000 worth of IBM stock. (a). How do these transactions show up in the
(a) Suppose the government reduces spending and finances the spending by issuing fewer bonds. What will be the short-run and long-run effects of this policy on the interest rate, the exchange rate,
Suppose the U.S. government imposes quotas on all items imported into the United States. Why might real GDP first increase and then decrease?
Holding other things constant, determine the impact of each of the following on net export demand: (a) a decrease in the exchange rate, (b) a decrease in the U.S. interest rate, (c) an increase in
How would the following transactions affect the balance of payments? (a) A U.S. household purchases a car from Germany, (b) A U.S. firm sells a bond to a Dutch investor, (c) A Japanese citizen tours
15. How can real GDP be increased in the long run?
14. Explain how the possibility of complete crowding out and partial crowding out gives rise to potential disagreements among policymakers about the desirability of using deficit-financed government
13. Explain why open market operations can have a short-run effect on the economy even if government spending remains fixed.
12. Suppose the government reduces spending and finances the spending cuts by printing less money. What are the short-run and long-run macroeconomic effects on the in¬ terest rate, the price level,
11. Suppose the government cuts spending and finances the spending cuts by reduc¬ing borrowing. What are the short-run and long-run macroeconomic effects on the in¬ terest rate, the price level,
10. Suppose the government cuts spending and finances the spending cuts by lower¬ ing taxes. What are the short-run and long-run macroeconomic effects assuming(a) the tax solely affects
9. Explain why the long-run aggregate sup¬ ply curve is vertical.
8. Explain why the short-run aggregate sup¬ ply curve slopes upward.
7. Holding everything else constant, deter¬ mine the short-run impact of the following on the equilibrium price level and real GDP.(a) . An increase in the interest rate (b) . A decrease in the
6. Determine the impact of the following on aggregate demand.(a) . An increase in the real interest rate(b) . A decrease in the money supply(c) . An increase in household taxes(d) . An investment tax
5. Holding other things constant, determine the impact (if any) of the following on in¬ vestment demand.(a) . An increase in the real interest rate(b) . A decrease in the money supply(c) . The
4. Holding other things constant, determine the impact (if any) of the following on government demand.(a) . An increase in the interest rate(b) . A decrease in the money supply(c) . An increase in
3. Holding other things constant, determine the impact (if any) of the following on consumption demand.(a) . An increase in the interest rate(b) . An increase in household taxes(c) . Increased
2. Explain why investment demand is graphed as downward sloping in Figure 16.4.
1. Show how the aggregate demand curve is derived from the investment demand, con¬ sumption demand, and government de¬ mand curves.
Prior to elections, government often pursues policies that stimulate the econ¬ omy, such as increasing government purchases or increasing the money supply. For example, it is claimed that in the
(a) Suppose the nominal equilibrium interest rate falls. What happens to the short-run equilibrium price level and real GDP assuming all other determi¬ nants of AD and SRAS remain the same? (b) The
Explain the impact of the following events on the position of the short-run aggregate supply curve, (a) A war in the Persian Gulf breaks out, drastically increasing the price of crude oil. (b)
Holding other things constant, determine the impact of each of the following scenarios on consumption demand, investment demand, and aggregate de¬ mand: (a) an increase in the real interest rate not
15. Why do Keynesians and monetarists sometimes disagree about the effects of monetary policy on interest rates?
14. The Fed wants to achieve an interest rate of 3 percent and a money stock of $700 billion. The economy is currently in equi¬ librium, with an interest rate and a money stock that are both below
13. Suppose real income increases. Assuming other things remain unchanged, what im¬ pact will this change have on the equilib¬ rium interest rate? Could the Fed change the monetary base in such a
12. Suppose the price level increases. Assum¬ ing other things remain unchanged, what impact will this change have on the equi¬ librium interest rate? Could the Fed change the monetary base in such
11. There has been some discussion about adding a transactions tax to all securities market purchases or sales. This would be much like an additional broker’s fee, but would be paid to the federal
10. What is the effect of an increase in wealth on money demand in the portfolio approach?
9. What are the effects of an increase in fees on deposits in the inventory model of money demand?
8. What is the effect of an increase in the price level on real money demand? On the real money supply? On equilibrium in the money market?
7. What are the determinants of money sup¬ ply in the model used in this chapter and adapted from the one in Chapter 14? How and why does each determinant shift the real money supply curve?
6. What are the determinants of money de¬ mand in the modern quantity theory? How do they affect the demand for real money balances? Why?
5. How does the modern quantity theory ex¬ pand on the simple quantity theory, on the inventory approach, and on the portfolio approach to money demand?
4. What are the determinants of money de¬ mand under the inventory approach? Un¬ der the portfolio approach?
3. Describe the portfolio approach to money demand. Does the transactions motive play any role in money demand under this approach? Explain.
2. Describe the inventory approach to money demand. Explain how this theory is based on the transactions motive for holding money and how interest rates and bank fees affect money demand under this
1. Describe the simple quantity theory of money demand. Explain how this theory is based on the transactions motive for holding money and how changes in in¬ come and prices affect money demand under
Would the Keynesian and monetarist views of money demand lead to dif¬ ferent conclusions regarding the impact of a reduction in the money supply on interest rates? Explain.
If tax rates increase and lead to a rise in tax avoidance activity, how might this affect money supply? How might it affect the interest rate and real money balances? Assume the money supply is
In our example of the inventory approach, we started with income of $3,000, an interest rate of .01, and fees of $15 per transaction. We asked what happens if income increases to $12,000 while fees
20. If the Fed has decided to try to minimize currency holdings because it has become too costly to maintain the stock of Federal Reserve notes, what actions might it take?
19. Some states have a tax on wealth, in which they charge a tax on bank deposits. What effect would this tax have on the banking system if it were adopted nation¬ wide?
18. Assume the currency to deposit ratio has increased. What is the effect on banking system reserves, deposits, loans, and the money supply? Can the Fed adjust the re¬ quired reserve ratio and/or
17. If loan rates and deposit rates both in¬ crease, what is the expected effect on the banking system?
16. If you read in the paper that the discount rate has increased, do you think this will tend to increase or decrease the money supply? Why?
15. The Fed receives interest income from its holdings of U.S. government bonds. When the Fed increases the monetary base, does this action increase or decrease the Fed’s income from its securities
14. President Clinton has suggested that taxes are going to increase. What do you predict will be the impact on the currency to de¬ posit ratio? Why? What impact will this prediction tend to have on
13. In the early 1980s, interest rates such as the prime rate and even the rate on U.S. Treasury bills reached unheard-of heights, nearing or even exceeding 20 percent. What do you think happened to
12. Historically an increase in the number of bank failures has been linked with an in¬ crease in the currency to deposit ratio. However, the recent savings and loan cri¬ sis, in which thousands of
11. Recently the government warned of an in¬ crease in drug trafficking. Assuming drugs are purchased solely with cash, what is the predicted effect on the banking system?
10. In the early 1980s, the Federal Reserve System lowered the required reserve ratio on deposits. What was the predicted effect on the banking system?
9. Suppose an eccentric millionaire buries $ 1 million in a time capsule in 1994. This time capsule will be opened by her heir, her great-granddaughter, in the year 2014. What is the effect on the
8. Go back to 1913, when the Fed was just created. Could the Fed easily conduct open market purchases? What about open market sales?
7. A substantial amount of U.S. dollars is in circulation outside the United States. Dol¬lars are often accepted in exchange—that is, as money—in countries around the world. Suppose something
6. Explain how the Federal Reserve System creates money by buying U.S. government securities in the open market.
5. If the legal reserve ratio is zero and banks hold no excess reserves, what will happen if the level of banking system reserves in¬ creases by $100? Does the currency to de¬ posit ratio matter
4. Obviously deposits are a crucial input into the production of loans by banks. What other resources is a bank likely to require to be able to produce (or supply) loans?
3. The required reserve ratio is 10 percent. The excess reserve ratio is zero, but the public desires to hold currency equal to 5 percent of deposits. If an open mar¬ ket purchase of $250,000
2. Consider a situation in which the required reserve ratio is 15 percent and each bank individually decides to hold 5 percent of every deposit against emergency with¬ drawals, in addition to the
1. The required reserve ratio is 12 percent. The desired currency to deposit ratio and the desired excess reserve ratio are both zero. If there is an open market purchase of $100,000, what will
Suppose the Fed engages in an open market purchase (it purchases govern¬ ment securities from a securities dealer). Graphically illustrate the impact of this action on the money supply when (a) the
Assuming other things remain constant, determine the impact of each of the following events on the money supply: (a) The Fed lowers the required reserve ratio; (b) the interest rate paid on deposits
What are the changes in deposits, currency holdings, and the money stock for an open market sale of $100,000? The required reserve ratio is 10 percent, the desired excess reserve ratio is 5 percent,
What is the total contraction of deposits, loans, and reserves in the entire banking system if the required reserve ratio is 5 percent and the Fed makes an open market sale of $150,000? What happens
What is the effect on a bank’s balance sheet of a withdrawal of $10,000? Assume the required reserve ratio is 5 percent, the bank held no excess reserves at the time of the withdrawal, and the bank
20. Assume you are a banker in the time of free banking. You start with $50,000 in gold, which you use to purchase govern¬ ment bonds for deposit in the state treas¬ ury. This transaction
19. Assume you are a banker in the time of free banking. You start with $50,000 in gold, which you use to purchase govern¬ ment bonds for deposit in the state treas¬ ury. This transaction
18. Is an open market operation that injects $ 1 million in reserves into the banking system more or less expansionary than a discount window operation that injects $1 million in borrowed reserves?
17. Do banks like high reserve requirements? Why or why not? What about the U.S.Continued from p. 443 government? Ignoring the effects on the financial health of banks, does a revenue- maximizing
16. What were the main changes made to the Fed by the DIDMCA of 1980?
15. What were the main reforms contained in the Banking Act of 1935?
14. During the era of the national banking system, there continued to be occasional periods of bank runs in which deposits could not be redeemed for currency. Did the Federal Reserve Act of 1913
13. What were the goals of those who origi¬ nally set up the Federal Reserve System in 1914? Were those goals achieved?Expain.
12. The free banking system is used as an ex¬ ample of why banking needs to be regu¬ lated. What were the problems with the free banking system? What is the evi¬ dence that insufficient regulation
11. What were the goals behind setting up the national banking system? Did the national banking system achieve those goals? Explain.
10. What were the goals of advocates of the free banking system? Did the free banking system achieve those goals? Explain.
9. Describe the chief features of the free banking system. Compare them with those of the national banking system.
8. What were some benefits of the First and Second Banks of the United States?
7. First, state the case favoring a less inde¬ pendent Fed. Second, state the case favor¬ing Fed independence. Which do you agree with, and why?
6. Considering question 5, what do you think of a proposal to raise more government revenue by instructing the Federal Reserve System to remit more money to the U.S. Treasury? Since the Federal
5. Obtain a copy of the current Economic Report of the President and find out the current U.S. government deficit and tax receipts. Then obtain the Bulletin of the Federal Reserve System and find out
4. What features of its design tend to make the Federal Reserve System independent of the elected branches of government? What features detract from its independ¬ ence?

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