Questions and Answers of Economics Of Money Banking And Financial Markets

The money multiplier links the monetary base to the quantity of money in the economy.a. The size of the money multiplier depends on:i. The reserve requirement.ii. Banks’ desire to hold excess
Explain the conventional policy tools used by major central banks.
Discuss the links between monetary policy tools and objectives.
Use a simple guide to analyze monetary policy.
Describe unconventional monetary policy tools and how they work.
The strategy of inflation targeting, which seeks to keep inflation close to a numerical goal over a reasonable horizon, has been referred to as a policy framework of “constrained discretion.”
Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by three percentage points.Target federal funds rate = Natural rate of interest + Current
The conventional Taylor rule places weights of one-half on the inflation gap and output gap, corresponding to the “dual mandate” of the U.S. central bank. Taking into account what you know about
With the policy interest rate at the effective lower bound, how might a central bank counter unwanted deflation?
The interest rate paid by the European Central Bank (ECB) on excess reserves declined below zero in 2014 (and remained there as of 2019). What was the rationale behind this move to a negative deposit
Suppose, immediately after the European Central Bank (ECB) began charging banks a fee for holding their excess reserves, the banks switched to holding cash in their vaults (rather than holding excess
You have been asked about the appropriate use of data in policy decisions by officials from a new central bank in a country that is economically similar to the United States. These officials
Suppose you were given the following information about two inflation–targeting economies.– Economy A has been volatile historically with the unemployment rate fluctuating widely around the
The Federal Reserve has four tools of conventional monetary policy.a. The target range for the federal funds rate:i. Set by the FOMC, it is the intended range for the interest rate charged by
The European Central Bank’s primary objective is price stability.a. The ECB provides liquidity to the banking system both through open market purchases of securities and through auctions called
Monetary policymakers use several tools to meet their objectives.a. The best tools are observable, controllable, and tightly linked to objectives.b. Short-term interest rates are the primary tools
The Taylor rule is a simple equation that describes movements in the target federal funds rate. It suggests that:a. When inflation rises, the FOMC raises the target rate by 1½ times the increase in
Unconventional monetary policy can supplement conventional policy when policymakers are no longer willing or able to lower the target rate or when an impaired financial system prevents conventional
Central banks have three principal tools of unconventional monetary policy:a. Forward guidance: communication regarding expected future policy target rates.b. Quantitative easing: supplying aggregate
Unconventional monetary policy is less predictable than conventional policy and potentially disruptive, so it is used only when the conventional toolkit is insufficient to stabilize the economy. One
Explain the links between exchange rates and monetary policy.
Describe the mechanics of exchange rate management.
Assess the costs, benefits, and risks of fixed exchange rates.
Analyze how fixed exchange rate regimes work.
Dollarizing and joining a monetary union both involve giving up a country’s own currency, but there are key differences between these two options.Identify one factor that might lead a country to
Show the impact on the Federal Reserve’s balance sheet of a foreign exchange market intervention where the Fed purchases $5,000 worth of foreign exchange reserves. Explain what impact, if any, the
Suppose that a central bank that is operating on the downward-sloping portion of the reserve demand curve decides to purchase $1,000 worth of foreign exchange reserves and then sterilize this foreign
In an increasingly integrated financial world, under what circumstances might you support the imposition of capital controls?
When capital flows freely across a country’s borders, fixing the exchange rate means giving up discretionary monetary policy.a. Purchasing power parity implies that in the long run exchange rates
Central banks can intervene in foreign exchange markets.a. When they do, it affects their balance sheet in the same way as an open market operation.b. When reserves in the domestic banking system are
The decision to fix the exchange rate has costs, benefits, and risks.a. Both corporations and investors benefit from predictable exchange rates.b. Fixed exchange rates can reduce domestic inflation
There are a number of examples of exchange rate systems.a. The Bretton Woods system, set up after World War II, pegged exchange rates to the U.S. dollar. It collapsed in 1971 after U.S. inflation
Discuss the role of the monetary aggregates.
Define the velocity of money and its role in the quantity theory of money.
Describe the transactions demand and the portfolio demand for money.
If velocity were constant at 1.5 while M2 rose from $11 trillion to $12 trillion in a single year, what would happen to nominal GDP? If real GDP rose 2.09 percent, what would be the level of
Explain why key central banks have shifted away from targeting money growth.
In a chart of money demand and money supply with the nominal interest rate on the vertical axis, show how a central bank could use its control over the quantity of money to target a particular level
There is a strong positive correlation between money growth and inflation.a. Every country that has had high rates of sustained money growth has experienced high rates of inflation.b. At very high
The quantity theory of money explains the link between inflation and money growth.a. The equation of exchange tells us that:i. The quantity of money times the velocity of money equals nominal GDP.ii.
Shifts in velocity are caused by changes in the demand for money.a. The transactions demand for money depends on income, interest rates, and the availability of alternative means of payment.b. The
The quantity theory of money and theories of money demand have a number of implications for monetary policy.a. Countries with high inflation can reduce inflation by controlling money growth.b.
Describe the determinants of output and inflation in the long run.
Show the role of monetary policy in the dynamic aggregate demand curve.
Characterize aggregate supply in the short run and the long run.
Explain short-run and long-run equilibrium using the dynamic aggregate demand and aggregate supply curves.
Assume the short-run aggregate supply curve can be expressed algebraically aswhere Yd is aggregate demand. Find the numerical values for equilibrium output, Y, and the equilibrium inflation rate, π,
Economy A and Economy B are similar in every way except that in Economy A, 50 percent of aggregate expenditure is sensitive to changes in the real interest rate and in Economy B, 70 percent of
You read a news story blaming the central bank for pushing the economy into recession. The article goes on to mention that not only has output fallen below its potential level but that inflation had
A Phillips Curve postulates a negative relationship between inflation and economic slack. However, the relationship between wage inflation and lagged unemployment appeared more negative in the 1960s
In the long run:a. Current output equals potential output, which is the level of output the economy produces when its resources are used at normal rates.b. Inflation equals money growth minus growth
The dynamic aggregate demand curve is a downward-sloping relationship between inflation and the quantity of output demanded by those who use it:a. Aggregate expenditure = Consumption + Investment +
The aggregate supply curve tells us the amount of output producers are willing to supply at given levels of inflation.a. The short-run aggregate supply curve slopes up because, in the short run,
Equilibrium output and inflation are determined by the intersection of the dynamic aggregate demand curve and either the short-run or long-run aggregate supply curve.a. The short-run equilibrium
Discuss the sources of fluctuations in output and inflation.
Use AS/AD tools to analyze changes in output and inflation.
Explain the challenges and tradeoffs that monetary policymakers face in stabilizing the economy.
Suppose that conflict over international trade leads to a fall in consumer confidence.Starting with the economy in long-run equilibrium, use the aggregate demand–aggregate supply framework to
If there is a fall in consumer confidence, what would happen to inflation and output in the long run if the central bank remained committed to its original inflation target and responded with an
Suppose the central bank took advantage of a temporary positive supply shock to lower its inflation target. Illustrate the impact of this change in the inflation target using an aggregate
Consider a previously closed economy that opens up to international trade. Use the aggregate demand–aggregate supply framework to illustrate a situation where this would lead to lower inflation in
Do you think GDP-linked bonds would be more useful in a relatively stable economy or in an economy that is frequently buffeted in the short run by demand and supply shocks, assuming these economies
Short-run fluctuations in output and inflation arise from shifts in either the dynamic aggregate demand curve or the short-run aggregate supply curve.a. A decrease in the central bank’s inflation
Applying the dynamic aggregate demand–aggregate supply framework we see that:a. Stabilization policy is the use of monetary and fiscal policy tools to stabilize output and inflation.i. Monetary
Analyze the monetary policy transmission mechanism.
Explain how an open market purchase of securities by a central bank affects the banking system’s balance sheet, and discuss the potential impact on the supply of bank loans.
Discuss key challenges facing monetary policymakers.
Explain why monetary policymakers’ actions in cutting the target range for the federal funds rate to 0 to 1∕4 percent were not sufficient to boost economic activity during the recession of
In the wake of the financial crisis of 2007–2009, would you expect the banklending channel to have become more or less important in the United States?Explain your answer.
How might the concept of GDP at Risk help central banks pursue a financial stability objective?
Recent financial regulatory reforms have eased capital requirements for banks.Under what circumstances might lowering capital requirements affect economic growth?
Monetary policy influences the economy through several channels.a. The traditional channels of monetary policy transmission are interest rates and exchange rates.i. Interest rates influence
Monetary policymakers face significant challenges. To be successful, they requirea. Accurate estimates of potential GDP, even when its growth trend is shifting.b. An understanding of how to cope with
Depository institutions have been losing their advantage over other financial intermediaries in attracting customers’ funds. Why?
In the aftermath of the financial crisis of 2007–2009, there were calls to reinstate the separation of commercial and investment banking activities that was removed with the repeal of the
The globalization of banking has led to the need for global benchmarks for interest rates. In light of the LIBOR scandal, what characteristic do you think is most central to any new interest rate
1. The United States has a comparatively large but declining number of banks.a. The large number of banks in the United States is explained by restrictions on branching, both within and across state
Nondepository institutions are playing an increasingly important role in the financial system. Five types of financial intermediary may be classified as nondepository institutions.a. Insurance
List and explain the six parts of the financial system.
Identify the five core principles of money and banking.
Describe the special features and organization of the book.
Various financial instruments usually serve one of two distinct purposes: to store value or to transfer risk. Name a financial instrument used for each purpose.
In a sequence of nine steps between December 2015 and December 2018, the Federal Reserve increased its policy interest rate target range by 2.25 percentage points from a historically low level of
What steps should you take to protect yourself from identity theft and why is it so important to do so in the context of the financial system?
A healthy and constantly evolving financial system is the foundation for economic efficiency and economic growth. It has six parts:a. Money is used to pay for purchases and to store wealth.b.
The core principles of money and banking are useful in understanding all six parts of the financial system.a. Core Principle 1: Time has value.b. Core Principle 2: Risk requires compensation.c. Core
Define money and describe its functions.
Discuss the different methods of payment and the future of money.
Explain how the money supply is measured and how it is linked to economic growth and inflation.
Describe four ways you could pay for your morning cup of coffee. What are the advantages and disadvantages of each?
A subset of European Union countries have adopted the euro, while the remaining member countries have retained their own currencies. What are the advantages of a common currency for someone who is
What do you think accounts for the widespread adoption of mobile-based payment services in emerging economies?
Under what circumstances might you expect barter to reemerge in an economy that has fiat money as a means of payment?
Consider a fruit-growing tropical island economy without money. Under what circumstances would you recommend the issue of a paper currency by the government of the island? What advantages might this
What factors should you take into account when considering using the following assets as stores of value?a. Goldb. Real estatec. Stocksd. Government bondse. Cryptocurrencies
What are some of the main obstacles to a faster, more efficient U.S. payments system and how might they be overcome?
What are some advantages and disadvantages of a government continuing to issue paper currency in the face of widespread financial innovation?
Money is an asset that is generally accepted in payment for goods and services or repayment of debts.a. Money has three basic uses:i. Means of payment ii. Unit of account iii. Store of valueb. Money
Money makes the payments system work. The payments system is the web of arrangements that allows people to exchange goods and services. There are three broad categories of payments, all of which use
To understand the links between money and inflation, we need to measure the quantity of money in the economy. There are two basic measures of money: M1 and M2.M1, the narrowest measure, includes only

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