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Questions and Answers of Banking

What are the key advantages and disadvantages of dollarization over other forms of exchange-rate targeting?
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,
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
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
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?
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
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
How can a large balance-of-payments surplus contribute to the country’s inflation rate?
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.
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
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.
What are the key advantages of exchange-rate targeting as a monetary policy strategy?
How can exchange-rate targets lead to a speculative attack on a currency?
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?
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 advantages and disadvantages of a currency board over a monetary policy that just uses an exchange-rate target?
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?
If interest rates on bonds go to zero, what does the Baumol-Tobin analysis suggest Grant Smith’s average holdings of money balances should be?
If brokerage fees go to zero, what does the Baumol-Tobin analysis suggest Grant Smith’s average holdings of money should be?
Looking at figure in the chapter, when were the two largest falls in velocity? What do declines like this suggest about how velocity moves with the business cycle? Given the data in figure, is it
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?
Both Keynes’s and Friedman’s theories of the demand for money suggest that as the relative expected return on money falls, demand for it will fall. Why does Friedman think that money demand is
Why does Friedman’s view of the demand for money suggest that velocity is predictable, whereas Keynes’s view suggests the opposite?
Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn't cut production, what effect would this have on their profits? Why?
Suppose that government policymakers decide that they will change taxes to raise aggregate output by $400 billion, and mpc = 0.5. By how much will taxes have to be changed?
If the point describing the combination of interest rate and aggregate output is not on either the IS or the LM curve, the economy will have no tendency to head toward the intersection of the
Calculate the value of the consumption function at each level of disposable income in Table 1 if a = 100 and mpc = 09.
Plot the consumption function C = 100 + 0.75Y on graph paper.a. Assuming no government sector, if planned investment spending is 200, what is the equilibrium level of aggregate output? Show this
Why are the multipliers in Problems 3and 4 different? Explain intuitively why one is higher than the other.
What happens to aggregate output if both taxes and government spending are lowered by $300 billion and mpc = 05? Explain your answer.
Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes?
What happened to the IS curve during the Great Depression when investment spending collapsed. Why?
What happens to the position of the LM curve if the Fed decides that it will decrease the money supply to fight inflation and if, at the same time, the demand for money falls?
The high level of interest rates and the rapidly growing economy during Ronald Reagan's third and fourth years as president can be explained by a tight monetary policy combined with an expansionary
Evidence indicates that lately the demand for money in has become quite unstable. Why is this finding important to Federal Reserve policymakers?
Predict what will happen to interest rates and output if a stock market crash causes autonomous consumer expenditure to fall.
If taxes and government spending rise by equal amounts, what will happen to the position of the IS curve? Explain this with a Keynesian cross diagram.
In late1969, the Federal Reserve reduced the money supply while the government raised taxes. What do you think should have happened to interest rates and aggregate output?
What will happen to the position of the aggregate demand curve if the money supply is reduced when government spending increases?
If money demand is unaffected by changes in the interest rate, what effect will a rise in government spending have on the position of the aggregate demand curve?
If a series of defaults in the bond market make bonds riskier and as a result the demand for money rises, predict what will happen to interest rates and aggregate output.
If government expenditure goes down while taxes are raised to balance the budget, what happens to the aggregate demand curve?
Profit-maximizing behavior on the part of firms explains why the short-run aggregate supply curve is upward-sloping. Is this statement true, false, or uncertain? Explain your answer.
If a pill were invented that made workers twice as productive but their wages did not change, what would happen to the position of the short-run aggregate supply curve?
When aggregate output is below the natural rate level, what will happen to the price level over time if the aggregate demand curve remains unchanged? Why?
If exports fall while imports rise, what happens to the aggregate demand curve?\
If the dollar increases in value relative to foreign currencies so that foreign goods become cheaper in the United States, what will happen to the position of the short-run aggregate supply curve?
Show how aggregate demand and supply analysis can explain why both aggregate output and the price level fell sharply when investment spending collapsed during the Great Depression.
An important difference between Keynesians and monetarists rests on how long they think the long run actually is. Is this statement true, false, or uncertain? Explain your answer.
Predict what will happen to aggregate output and the price level if the Federal Reserve increases the money supply at the same time that Congress implements and income tax cut.
Suppose that the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the price level
Proposals have come before Congress that advocate the implementation of a national sales tax. Predict the effect of such a tax on both the aggregate supply and demand curves and on aggregate output
When there is a decline in the value of the dollar, some experts expect it to lead to a dramatic improvement in the ability of American firms to compete abroad. Predict what would happen to output
Suppose that a researcher is trying to determine whether jogging is good for a person's health. She examines this question in two ways. In method A, she looks to see whether joggers live longer than
If research indicates that joggers live longer than nonjoggers, is it possible that jogging is not good for your health? Give a concrete example.
Suppose that you plan to buy a car and want to know whether a General Motors car is more reliable than a Ford. One way to find out is to ask owners of both cars how often their cars go into the shop
If the GM car you plan to buy has a better repair record than a Ford, does this mean that the GM car is necessarily more reliable? (GM car owners might, for example, change their oi1 more frequently
Suppose that when you visit the Ford and GM car factories to examine how the cars are built, you only have time to see how well the engine is put together. If Ford engines are better built than GM
How did the research strategies of Keynesian and monetarist economists differ after they were exposed to the earliest monetarist evidence?
The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates." Is this
The monetarists have demonstrated that the early Keynesians were wrong in saying that money doesn't matter at all to economic activity. Therefore, we should accept the monetarist position that money
How might bank behavior (described in Chapter 16) lead to causation running from output to the money supply? What does this say about evidence that finds a strong correlation between money and output?
What operating procedures of the Fed (described in chapter17) might explain how movements in output might cause movements in the money supply?
In every business cycle in the past 100 years, the rate at which money supply is growing always decreases before output does. Therefore the money supply causes business cycle movements." Do you
In the 1973-1975 recession, the value of common stocks in real terms fell by nearly 50%. How might this decline in the stock market have affected aggregate demand and thus contributed to the severity
Predict what will happen to stock prices if the money supply rises. Explain why you are making this prediction.
Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.
Why do economists focus on historical episodes of hyperinflation to decide whether inflation is a monetary phenomenon?
“A cost-push inflation occurs as a result of workers’ attempts to push up their wages. Therefore, inflation does not have to be a monetary phenomenon.” Is this statement true, false, or
“Because government policymakers do not consider inflation desirable, their policies cannot be the source of inflation.” Is this statement true, false, or uncertain? Explain your answer.
In a speech early in the Iraq=Kuwait crisis in 1990, President Georg H.W. Bush stated that although his heart went out to the hostages held by Saddam Hussein, he would not let this hostage-taking
There are frequently years when the inflation rate is high and yet money growth is quite low. Therefore, statement that inflation is a monetary phenomenon cannot be correct. Comment.
“Because increases in government spending raise the aggregate demand curve, fiscal policy by itself can be the source of inflation.” Is this statement true, false, or uncertain? Explain your
“A budget deficit that is only temporary cannot be the source of source of inflation.” Is this statement true, false, or uncertain? Explain your answer.
How can the Fed’s desire to prevent high interest rates lead to inflation?
”If the data and recognition lags could be reduced, discretionary policy would more likely be beneficial to the economy.” Is this statement true, false, or uncertain? Explain your answer.
The more sluggish wage and price adjustment is, the more variable output and the price level are when a discretionary policy is pursued. Is this statement true, false, or uncertain? Explain your
“If the public believes that the monetary authorities will pursue a discretionary policy, a cost-push inflation is more likely to develop.” Is this statement true, false, or uncertain? Explain
“The less important expectations about policy are to movements of the aggregate supply curve, the stronger the case is for discretionary policy to eliminate unemployment.” Is this statement true,
“To prevent inflation, the Fed should follow Teddy Roosevelt’s advice:’ Speak softly and carry a big stick.” What would the Fed’s “big stick” be? What is the statement trying to say?
If consumer expenditure is related to consumers’ expectations of their average income in the future, will an income tax cut have a larger effect on consumer expenditure if the public expects the
The costs of fighting inflation in the new classical and new Keynesian models are lower than in the traditional model. Is this statement true, false, or uncertain? Explain your answer?
Which principle of rational expectations theory is used to prove the proposition that stabilization policy can have no predictable effect on aggregate output in the new classical model?
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.
Suppose that a treaty is signed limiting armies throughout the world. The result of the treaty is that the public expects military and hence government spending to be reduced. If the new classical
The chairman of the Federal Reserve Board announces that over the next year, the rate of money growth will be reduced from its current rate of 10% to a rate of 2%. If the chairman is believed by the
If the public expects the Fed to pursue a policy 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 long-term
Having studied the new classical model, the new chairman of the Federal Reserve Board has thought up a surefire plan for reducing inflation and lowering unemployment. He announces that the Fed will
The new classical model is an offshoot of the monetarist framework because it has a similar view of aggregate supply. What are the differences and similarities between monetarist and new classical
The new classical model does not eliminate policy-makers’ ability to reduce unemployment because they can always pursue policies that are more expansionary than the public expects. Is this
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.
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?
How would your prediction differ in problem 11 if the new Keynesian model provides a more realistic description of the economy? What if the traditional model provides the most realistic description
How would your prediction differ in problem 13 if the new Keynesian model provides a more accurate description of the economy? What if the traditional model provides the most realistic description of
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
Sea lions off the Washington coast eat steelhead and other fish, depleting some species threatened with extinction and decreasing the harvest of the commercial fishing industry. Rick Funk is a
There are scale economies in the production of electricity from wind because electricity can be generated from turbines of different sizes. Although large wind turbines are more costly than small
A music video is an information good a product that is essentially a bundle of information. Most of the cost of producing an information good results from collecting the information and making a
Photovoltaic cells (or solar cells) convert sunlight directly into electricity. In 1980, the capital cost of solar cells was about $20 per watt of electricity generated. Technological innovation
1. The computation of economic cost is based on the principle of __________.2. A firms implicit cost is defined as the cost of non purchased inputs, such as the entrepreneur’s _________and

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