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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Would you expect the bank lending channel (as it operates through commercial banks) to have a larger or a smaller effect in emerging economies, such as Brazil or India, than in the United States?
John Maynard Keynes developed a model, later elaborated by John Hicks, in which total output is determined solely by total spending with little consideration of the supply (production) side of the
What is Okun’s law, and how can it be used to derive an output gap Phillips curve?
Explain how the IS curve represents equilibrium in the goods market. Why is the IS curve downward sloping?
In the bank lending channel as it operates through commercial banks, an expansionary monetary policy is not dependent for its effectiveness on a reduction in interest rates, and a contractionary
Use the IS–MP model (including the output gap Phillips curve) to analyze how the Federal Reserve would respond to a large positive demand shock. Assume that the economy was in longrun macroeconomic
What factors cause the Phillips curve to shift?
Go to the web site of the Federal Reserve Bank of St. Louis Federal Reserve (FRED) (fred.stlouisfed.org) and download data from January 2003 to the most recent available month on the 10-year constant
When the Federal Reserve changes the real interest rate to affect the output gap and inflation rate, do each of the following monetary policy channels reinforce or partially offset the effect of the
Why is the MP curve a horizontal line? How is the Fed able to change the position of the MP curve?
What is the default risk premium, and why did it dramatically increase during the 2007–2009 recession? How did this increase affect the MP curve and the output gap?
When the Federal Reserve increases the real interest rate, is the result a movement up or down the IS curve? Does the value of the output gap increase or decrease?
Draw a 45°-line diagram showing an equilibrium in the goods market. Label the equilibrium level of real GDP, Y1. Now show on your graph each of the following two situations:1. Real GDP is equal to
Go to the web site of the Federal Reserve Bank of St. Louis Federal Reserve (FRED) (fred.stlouisfed. org) and download data on the interest rate on AAA rated corporate bonds (AAA) and the interest
If monetary policy does not cause a change in interest rates, can it still affect the output gap and the inflation rate? Briefly explain.
When the Federal Reserve lowers the real interest rate, what happens to the output gap and to the inflation rate?
Describe each of the three parts of the IS–MP model.
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download to the same graph data from January 1984 to the most recent available month on the nominal
What do economists mean by the “channels of monetary policy”?
Draw graphs showing long-run macroeconomic equilibrium in the IS–MP model. One of your graphs should show the output gap version of the Phillips curve. In long-run equilibrium, what does the output
How can changes in the federal funds rate cause changes in long-term real interest rates?
In 2016, a columnist for the Wall Street Journal wrote:For years, the world has looked to central banks to deploy whatever tools they had to prop up economic growth. Now, just as those tools reach
Economist Robert Gordon has written the following:During 1939, more than any other year in the dismal Depression decade, the American economy exhibited every evidence of slipping into a
Writing in the New York Times, economist Tyler Cowen of George Mason University argued:In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New
A Federal Reserve publication notes:During recessions, decreases in consumption [from an increase in saving] could inhibit economic recovery. However, in the long run, the accumulated money from
Hydraulic fracturing has caused a dramatic reduction in the cost of producing natural gas and petroleum.a. Briefly explain which industries are likely to be most directly affected by these cost
Shortly before leaving her position as chair of the President’s Council of Economic Advisers in the Obama administration, Christina Romer observed:“The only surefire ways for policymakers to
In a speech in June 2016, Jerome Powell, a member of the Federal Reserve’s Board of Governors, noted that the fraction of the U.S. population aged 25 to 54 who were working or actively looking for
Assume that the economy is initially in equilibrium at potential GDP. Suppose that there is a decrease in income in Europe that causes a decrease in demand for U.S.-produced goods. Use an AD–AS
If the long-run aggregate supply curve shifts, does the short-run aggregate supply curve also have to shift? If the short-run aggregate supply curve shifts, does the long-run aggregate supply curve
In the early to mid-2000s, stock prices and housing prices rose substantially. What effect would these increases in household wealth have on the saving rate and on consumption spending? How would the
Normally we think of the factors that cause the AD curve to shift as being different from the factors that cause the LRAS curve to shift. Is this still true in the case of hysteresis? Briefly explain.
Assume that the economy is initially in equilibrium at potential GDP. Use an AD–AS graph to show the effect of an increase in government purchases on the price level and the output level in the
In 2015, the Chinese government announced that it would switch from relying on stimulating the economy through expansions in aggregate demand to relying on expansions in aggregate supply. According
Stanley Fischer, vice-chair of the Federal Reserve, remarked that fluctuations in the exchange rate affects aggregate demand in the United States:“So that is the channel through which the exchange
Assume that the economy is initially in equilibrium at potential GDP. Then suppose that the economy is hit simultaneously with a positive aggregate demand shock and a negative aggregate supply shock:
Suppose that in Year 1 the price level equals 110 and the output level equals $14 trillion and that in Year 2 the price level equals 104 and the output level equals $13 trillion. In the AD–AS
In an opinion column on bloomberg.com, economist Tyler Cowen of George Mason University notes: “Keynesian economics focuses on sticky nominal wages as one obstacle to increasing production.”
Use a money market graph to explain the effect of a decrease in the price level on the equilibrium interest rate. How does the change in the interest rate affect planned investment spending,
Given that the economy can correct itself and return to potential GDP, why would the Federal Reserve pursue expansionary monetary policy following a negative aggregate demand shock? How could the Fed
In an opinion column in the Wall Street Journal in 2016, Harvard economist Martin Feldstein referred to “a possible negative shock—such as a sharp fall in exports or in construction—that could
Draw graphs to show the effect of each of the following on the short-run aggregate supply curve:a. A decrease in the expected price levelb. A decrease in oil pricesc. The development of laptop
Briefly explain whether each of the following events would shift the aggregate demand curve to the right or to the left.a. The Federal Reserve lowers the target for the federal funds rate.b. The
The Federal Reserve can use expansionary or contractionary policy to shift the aggregate demand curve. Use an AD–AS graph to show how monetary policy should be used to return output to potential
Can the economy be in a short-run macroeconomic equilibrium without being in a long-run macroeconomic equilibrium? Can the economy be in a long-run macroeconomic equilibrium without being in a
Use the equation Y = YP + a(P - Pe) to explain why in the new classical view, the shortrun aggregate supply curve is positively sloped and the long-run aggregate supply curve is vertical.
How does an increase in the interest rate affect each of the following categories of aggregate expenditure?a. Investment spending by firms on plant and equipment.b. Consumption spending by
What is hysteresis, and what problems might it pose for an economy?
Does monetary neutrality mean that changes in the money supply can never affect real GDP? Briefly explain.
What is the primary reason that households and firms demand money? Why is the demand for real money balances downward sloping?
What policies might the Federal Reserve use to counteract an aggregate demand shock?
Suppose that the economy is initially in equilibrium at potential GDP. If there is a decrease in aggregate demand, use an AD–AS graph to show the effects on the price level and the output level in
What is meant by the term price stickiness in the new Keynesian view? What explains price stickiness?
Why is the AD curve downward sloping?
Why might attempts to fine-tune the economy be ineffective? Instead of fine-tuning, what do economists generally advocate that policymakers do?
When the economy is in a short-run equilibrium, with output greater than potential GDP, what will happen to the short-run aggregate supply curve? Briefly explain.
In the new classical view, why can’t firms distinguish between increases in the general price level and increases in the relative prices of their products?
Briefly describe each of the four components of aggregate expenditure.
Are all business cycles the same in terms of length and severity?
In a graph illustrating the AD–AS model, where does short-run equilibrium occur, and where does long-run equilibrium occur? At what level of output does long-run equilibrium occur?
How do the slopes of the short-run aggregate supply curve and the long-run aggregate supply curve differ?
Writing on his blog in 2016, former Fed Chairman Ben Bernanke noted: “Here is the trilemma in action: If China wants to use monetary policy to manage domestic demand and to simultaneously free up
An article in the New York Times in 2016 notes that both Hillary Clinton and Donald Trump “want to label China as a currency manipulator.”a. What is a currency manipulator? Why would China want
An article in the Wall Street Journal discussing the possibility that Greece might leave the eurozone observes: “Traditionally, devaluations are viewed as providing a short-run spur to growth.”a.
An article in the Economist in 2016 notes that the “euro crisis” didn’t keep four additional countries—Slovakia, Estonia, Latvia, and Lithuania—from joining the eurozone between 2009 and
An opinion column in the Washington Post notes that the U.S. dollar is “the world’s dominant international currency.” The column also argues that, as a result, “we constantly run sizable
In discussing the Bretton Woods system, Michael Klein, an economist at Tufts University, observes: “Investors face a ‘one-way bet’ against central banks when they perceive an increased
Evaluate the following argument:The United States did not really leave the gold standard in 1933. Under the Bretton Woods system, the United States stood ready to redeem U.S. currency for gold at a
What effect does each of the following have on the U.S. monetary base?a. The Fed purchases $10 billion of foreign assets.b. The Fed sells $10 billion of foreign assets and purchases $10 billion of
In discussing the situation of countries leaving the gold standard, or “unilaterally devaluing” during the 1930s, Barry Eichengreen of the University of California, Berkeley, and Jeffrey Sachs of
What is the difference between a sterilized foreign exchange intervention and an unsterilized foreign exchange intervention?
An article in the Wall Street Journal in June 2016 notes: “The Fed’s preferred measure of consumer prices has fallen short of the central bank’s 2% annual target for 48 consecutive months.”
If a country imposes capital controls that result in its financial account balance being zero, would it be possible for the country to run a current account deficit? Briefly explain.
Use T-accounts to show the effect on the Fed’s balance sheet of the Fed buying $2 billion in German government bonds, denominated in euros, and, at the same time, conducting an open market sale of
Under a gold standard, is inflation possible? Consider both the case for an individual country and the case for the world as a whole.
In 2016, Egypt was trying to keep the exchange rate between its currency (the Egyptian pound) and the U.S. dollar constant. An article in the Wall Street Journal observed that if the Egyptian
According to an article in the Wall Street Journal in 2016:Small changes in the yuan have touched off big swings in markets across the world, and the dollar has shot up against just about every
Use T-accounts to show the effect on the Fed’s balance sheet of the Fed selling $5 billion in Japanese government bonds, denominated in yen. What happens to the Fed’s international reserves and
What is the policy trilemma? How do U.S. policymakers deal with the policy trilemma?
Suppose that the U.S. government sells old warships worth $300 million to Japan, and Japan’s government pays for them with its official holdings of dollar assets. How is this transaction recorded
An article in the Wall Street Journal in 2016 noted:“Denmark’s central bank has sold Danish kroner to weaken its currency and keep the euro within a … target range.”a. What does it mean to
Allan Meltzer, an economist at Carnegie Mellon University, once argued:I have yet to see a study that shows that sterilized intervention, the most common type of intervention used by the Fed in the
What is pegging? What are the advantages of pegging? What are the disadvantages? Briefly discuss the controversy over China’s management of the yuan-dollar exchange rate.
Suppose that a U.S. firm buys 10 Volkswagen cars for $20,000 each, and the German company uses the money to buy a $200,000 U.S. Treasury bond at a Treasury auction. How are these two transactions
Suppose the Bank of Japan sells $5 billion of U.S. Treasury securities. Use a graph of the demand and supply of yen in exchange for dollars to show the effect on the exchange rate between the yen
An article in the Wall Street Journal about the policies of the People’s Bank of China observes: “Currency intervention … expands the central bank’s balance sheet and adds to the money
What is the eurozone? How do the countries of the eurozone benefit from using a single currency? What are the disadvantages to using a single currency?
If the U.S. current account deficit is $400 billion, and if the statistical discrepancy is zero, what is the financial account balance? Does this financial account balance represent a net capital
On the foreign exchange market, who demands dollars—U.S. investors or foreign investors? Why does an increase in U.S. interest rates relative to Japanese interest rates increase the demand for
Under the Bretton Woods system, what were devaluations and revaluations? What is the difference between a devaluation and a depreciation? Why were countries hesitant to pursue a devaluation? Why were
How do central banks use official reserve assets?
What are capital controls, and why might a country impose them? What are the disadvantages of imposing capital controls?
Does a purchase of foreign assets by the Fed have a greater effect, the same effect, or a smaller effect on the monetary base than an open market purchase of government bonds by the Fed? Briefly
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the U.S. current account balance (BOPBCA) from the first quarter of
Briefly answer each of the following questions about the gold standard:a. Was it a fixed exchange rate system or a flexible exchange rate system?b. Were countries able to pursue active monetary
Why must the current account balance plus the financial account balance equal zero? Briefly explain in what sense a country can run a balance-of-payments surplus or a balance-of-payments deficit.
How does a sterilized central bank intervention affect the demand curve and the supply curve for a country’s currency?
If the Fed sells $2 billion of foreign assets, what happens to the Fed’s holdings of international reserves and to the monetary base?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the yuan–dollar exchange rate (DEXCHUS) from July 2010 until the
Briefly explain how the gold standard operated. What were the key differences between the gold standard and the Bretton Woods system?

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