A.

Read the case below and answer the following questions:

1. Across countries, why prices of stocks have fallen sharply? Explain how economic and financial uncertainty influence investors decisions about investment in the stock market.

2. " The sharp decline in interest rates, combined with growing anxiety about the economic outlook, have also raised investor concerns about the health of banks." Can you explain how interest rates affect the health of the banking system? You may also explain how the corona crisis influences interest rates. Now given the crisis can we forecast future rates of interest?

"Impact of Coronavirus on Global Monetary and Financial Stability"

The global spread of the coronavirus is a human tragedy unfolding across the world. Quantifying the economic impact is complex, giving rise to significant uncertainty about the economic outlook and the associated downside risks. Such an abrupt rise in uncertainty can put both economic growth and financial stability at risk. In addition to targeted economic policies, the right monetary and financial stability policies will be vital to help buttress the global economy.

Measures of economic uncertainty such as equity market volatility increased sharply in countries around the world. Stock markets in major economies, such as the United States, the Euro area, and Japan, all fell sharply and witnessed a surge in implied volatility as skittish investors tried to factor in the latest risks posed by the new virus.

As a result of this sharp increase of uncertainty, credit spreads have widened broadly across markets as investors are reallocating from relatively risky to safer assets. High-yield and emerging-market bonds are hit particularly hard by these reallocations. As a result, the spreads of emerging- and frontier-market bonds denominated in U.S. dollars have widened sharply.

Financial conditions have tightened significantly in recent weeks, which means that companies are facing higher funding costs when they tap equity and bond markets. Such a sudden, sharp tightening in financial conditions acts as a drag on the economy, because firms postpone investment decisions and because individuals delay consumption as they feel less financially secure.

Monetary policy response

The sharp tightening in financial conditions, along with expectations of low inflation, means that monetary policy has a role to play at the current juncture. Central banks can act quickly to help ease the tightening of financial conditions by injecting liquidity and cutting interest rates, thus preventing a possible credit crunch. In fact, markets have been anticipating aggressive easing by central banks, as reflected in the sharp fall in sovereign bond yields in many countries around the world.

Synchronized actions across countries increase the power of monetary policy. Therefore, global cooperation to synchronize monetary policy must be high on the agenda. Ample liquidity within countries, and across borders, is the prerequisite to the successful reversal of the rapid tightening in financial conditions. In these unusual circumstances, if liquidity pressures threaten market functioning, central banks may need to step in and provide emergency liquidity.

If economic and financial conditions were to deteriorate further, policymakers could revert to the broader toolkit that was developed during the financial crisis. For example, the Federal Reserve launched the Term Asset-Backed Securities Loan Facility in 2009, which provided targeted funding. The Bank of England and U.K. Treasury introduced the Funding for Lending Scheme, where a funding subsidy was provided to incentivize the expansion of lending to households, small and mid-sized enterprises and non-financial corporates. Other authorities, too, have deployed variants of such lending schemes that aim at lowering the costs of borrowing in certain sectors.

Financial stability policies

The sharp decline in interest rates, combined with growing anxiety about the economic outlook, have also raised investor concerns about the health of banks. Banks' share prices have fallen sharply, and bond prices of banks have also come under some pressurelikely reflecting fear of potential losses.

The good news is that banks are generally more resilient than before the 2008 financial crisis, because they have greater capital and liquidity cushions. This means the risks to financial stability stemming from the banking sector are much lower, despite declining share prices.

Supervisory authorities should, however, monitor developments at banks very closely. Given the temporary nature of the virus outbreak, banks could consider a temporary restructuring of loan terms for the most-affected borrowers. Supervisors should work closely with banks to ensure that such actions are both transparent and temporary. The goal must be to preserve banks' financial strength and overall transparency across the financial sector.

Authorities should also be alert to possible financial stability threats from outside the banking system. This requires an increased focus on asset managers and exchange-traded funds, where investors might liquidate risky investments suddenly.

Large swings in asset prices can quickly put markets and institutions under pressure. While market functioning has been able to withstand large swings in asset prices so far, anecdotal evidence suggests that liquidity has been tightening in many markets. And there are strains in U.S. dollar funding markets, where non-U.S. banks and corporates borrow in U.S. dollars.

Overall, policymakers must act decisively and cooperate at the global level to preserve monetary and financial stability during this time of extraordinary challenges. The mantra of "hoping for the best, preparing for the worst" has long been successfully deployed. The IMF will act as needed to help its members face this extraordinary, but hopefully temporary, crisis.

B.

Vwalika plc was created on 1 January 2010 with a share capital of K150,000, fully paid in cash on that date. The price level index at that date was 100. The following transactions were recorded:

Purchased equipment for K90,000, K40,000 paid when the index was 100, and payment of the balance being deferred for 18 months.

Purchased goods for K88,000 when the index was 100.

Purchased goods for K90,000 when the index was 110.

Sold goods for K200,000 when the index was 120, the cost of sales amounting to K120,000. Cash expenses amounted to K32,000, and a depreciation provision of 10 per cent on historic cost of equipment was made at year end.

Additional information as at 31 December 2010 was as follows:

Trade debtorsK36,000

Bank balanceK81,000

CreditorsK67,000

Closing inventory was valued at K58,000 on a FIFO basis.

The index at year end was 120.

Required:

Calculate the purchasing power gain or loss on the monetary items.

Prepare n inflation-adjusted income statement for the year ended 31 December 2010.

Prepare n inflation- adjusted balance sheet as at 31 December 2010 when the price level index was 130.

C.Monetary Policy

1. _________ is the chairperson of the Federal Reserve Board of Governors. (You need to know his full name. You need to be able to spell it correctly.)

2. An increase in the reserve requirement ratio causes the money multiplier to increase.

True

False

3. Think about the loanable funds market. If the Federal Reserve engages in an open market purchase of government, the supply curve jQuery224018475431522776264_1622596217909? and the real interest rate ???.

4. Think about the loanable funds market. If the Federal Reserve engages in an open market sale of government, the supply curve ??? and the real interest rate ??? .

5. When the Federal Reserve engages in an open market sale, this pushes the interest rate ??? and the aggregate demand curve shifts to the ???? .

6. The Federal Reserve is attempting to increase the aggregate demand curve to fight a recession. Which of the following would accomplish their goal? Check all that apply.

Increase the reserve requirement.

Decrease the reserve requirement.

Sell government securities.

Buy government securities.

Increase income tax rates

decrease income tax rates

7. The Federal Reserve is attempting to decrease the aggregate demand curve to fight inflation. Which of the following would accomplish their goal? Check all that apply.

Increase the reserve requirement.

Decrease the reserve requirement.

Sell government securities.

Buy government securities.

increase income tax rates

decrease income tax rates

8. Assume that the bank currently has excess reserves of zero, and the required reserve ratio is 10%.If the Fed buys $150 million, the amount of new loans that the bank can make initially increases by _______ million. Be exact.

9. If the economy is currently operating at potential GDP, an open market purchase of government securities by the Federal Reserve Board will put upward pressure on prices.

True

False

10. Assume that the bank currently has excess reserves of zero, and the required reserve ratio is 20%.If the Fed sells $120 million of government securities to JeffCo Bank, the amount of loans that the bank can make decreases initiallyby _______ million. Be exact.

11. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 3%?

Answer: _____%

12. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 1%?

Answer: _____%

13. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 5% and GDP is currently growing at 1%?This is an example of stagflation where the economy experiences inflation with slow growth.

Answer: _____%

14. When the Fed used quantitative easing to combat the Great Recession, they purchased assets from bank balance sheets. What did the Fed think that banks would do in response? Explain why you believe this outcome would occur.

15. What action did the FOMC take at their last meeting?