Download Midterm 3

ECO 212
Fall 2011 Semester
Midterm 3
Exam No. ________
Name: _______________________
ID #: ________________________
Part I Use the space provided or the back of the page if necessary.
1.
A bank’s managers and government regulators are having a disagreement over the
value of bank assets and liabilities, and therefore over what the “true” value of bank
capital is. Explain why it is so difficult to determine this true value.
2.
After minimum bank capital standards were established, regulators in many
countries adopted more complex standards that assigned different levels of required bank
capital for different types of assets. (A bank’s capital must be at least 8% of commercial
loans, plus 4% of investment-grade marketable securities, etc.) Explain why these
weighted capital standards might accomplish better the goals of the capital standard than
the simple standard.
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3.
Suppose a bank has the balance sheet below, and is required to hold reserves
equal to 10% of deposits and maintain bank capital equal to 8% of total assets. The bank
creates a subsidiary company – call it “SPV”. The bank invests 100 of its reserves in the
SPV. The SPV borrows 900 from investors and uses the funds to purchase 1000 of bonds.
Would the bank want to list its ownership of SPV as being an asset worth 100, or would
the bank want to list the 1000 of interest-bearing assets and 900 of debt on its balance
sheet? Why?
(Before setting up SPV)
_____________Bank_____________
Reserves 200
| Deposits 1000
Securities 200 | Borrowing 800
Loans
1600 | Bank Capital 200
___________SPV_________
bonds 1000 | borrowing 900
| net worth 100
4.
Why do banks and regulators so frequently get into nit-picky arguments about
accounting rules?
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5.
A central bank acts to maintain low and stable inflation, but also acts as a lender
of last resort to the banking system. In the United States, the Fed performs these
functions. If the Fed suffers a loss as a result of emergency loans to a bank that is
insolvent, this loss is shared by all US taxpayers, regardless of whether the bank is in
New York or California.
A central bank also acts to ensure that there is a stable and reliable market for government
debt by being a purchaser of government debt during times of panic when no other buyer
is available. If the Fed suffers a loss (or creates inflation) as a result of purchasing US
government debt, that loss (or inflation) is shared by all US taxpayers.
Currently in Europe, there is the danger that banks in some parts of the Euro-zone may be
in need of a lender of last resort. There may be a need for an official buyer of government
debt issued by Euro-zone governments. Yet the European Central Bank (ECB) does not
have authority to perform these functions, and many European governments seem
reluctant to give the ECB the authority to do so. Why?
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Part II: Instructions: Select the best answer for each question and record your answer
on the exam.
1.
The Quantity Theory of Money Demand states that the velocity of money should
_________ . Actual data from the economy suggest that the velocity of money
__________.
a.
b.
c.
d.
e.
remain fairly constant;
rise during recessions;
fall during recessions;
rise during recessions;
none of the above.
rises during recessions.
falls during recessions.
rises during recessions.
is fairly constant.
2.
add:
In order to find the monetary base on the central bank's balance sheet, one would
a.
b.
c.
d.
e.
central bank notes plus deposits of banks at the central bank.
international reserve assets plus loans to commercial banks
loans to commercial banks plus central bank notes.
loans to commercial banks plus deposits of government agencies.
none of the above.
3.
In the Keynesian view of money demand, the _________ motive for holding
money is related to its role as a store of wealth. If money held because of this motive
increased suddenly, that would imply that _____________.
a.
b.
c.
d.
e.
precautionary
transactions
precautionary
speculative
none of the above.
interest rates would rise
the price level would rise
output would fall
the velocity of money would rise suddenly
4.
In the diagram (above) which shows the RETd and RETf , an increase in the
expected future exchange rate (# units of foreign currency per one unit of domestic
currency) will:
a.
b.
c.
d.
e.
shift the RETd to the right, and raise the current value of the domestic currency.
shift the RETf to the right, and raise the current value of the domestic currency.
shift the RETd to the left, and raise the current value of the domestic currency.
shift the RETf to the right, and reduce the current value of the domestic currency.
none of the above.
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5.
When a central bank purchases its own currency in foreign exchange markets in
order to raise the foreign exchange value of the currency, this transaction is called _____.
This transaction also has the effect of _____ the domestic money supply.
a.
b.
c.
d.
e.
open market operations
open market operations
intervention
intervention
sterilization
raising
lowering
raising
lowering
raising
6.
When a central bank carries out a sterilized intervention in foreign exchange
markets, it wishes to change the _____ but does not want to change the _____.
a.
b.
c.
d.
e.
domestic money supply
domestic interest rates
foreign exchange rate
foreign exchange rate
domestic money supply
domestic interest rates
foreign exchange rate
holdings of international reserve assets
domestic money supply
foreign exchange rate
7.
The Keynesian Theory of Money Demand states that the motives for holding
money include the:
a.
b.
c.
d.
e.
savings, spending, and precautionary motives.
the speculative, transactions, and precautionary motives.
inflationary, precautionary, and investment motives.
speculative, normative, and positive motives.
transactions, savings, and investment motives.
8.
In order to use the simple deposit multiplier to describe the creation of new money
supply from a given change in the monetary base, we need to assume:
a.
bank capital is kept to a minimum, and banks lend money at zero interest.
b.
banks lend out all excess reserves, and the public deposits all its cash into banks.
c.
all required reserves are held as deposits at the central bank, and all excess
reserves are held as vault cash.
d.
banks use their excess reserves to make loans instead of buying bonds, and the
public maintains a constant proportion of their money as bank accounts.
e.
banks lend out all their deposits, and households hold all of the reserves.
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9.
_____ would increase the currency-to-deposit ratio (or c) and _____ would
increase the excess reserve-to-deposit ratio (or e).
a.
an increase in illegal activities; an increase in variability of deposit flows
b.
an increase in interest rates on deposits; an increase in the interest raid paid on
borrowed reserves.
c.
an increase in income; an increase in the interest raid earned on bank loans.
d.
an increase in the interest raid paid on holdings of reserves at the central bank; an
increase in illegal activities.
e.
an increase in the interest rate paid on deposits, a bank panic
10.
Which of the following transactions would increase the monetary base?
a.
b.
c.
d.
bank.
e.
A depositor deposits some cash into a bank.
A commercial bank sells a security to an individual.
A commercial bank borrows bank reserves from another commercial bank.
A commercial bank transfers some of its vault cash to its deposit at the central
none of the above.
11.
If the required reserve ratio is r, the currency-to-deposit ratio is c, and the excess
reserve to deposit ratio is e, the money multiplier is (1 + c)/(c + e + r). The money
multiplier tells the central bank:
a.
how much new money will be created if the central bank creates $1 of new
monetary base, assuming bank and depositor behavior stay about the same.
b.
how much new deposits will be created if the central bank creates $1 of new
currency, assuming that the banks will hold all reserves as vault cash.
c.
how much extra monetary base will be created if the central bank creates $1 of
new bank reserves, if the banking system holds it all as excess reserves.
d.
how much new money will be created if the central bank creates $1 of new
monetary base, if the public holds all deposits and the banks make no new loans.
e.
none of the above.
12
The sum of Vault Cash held by banks, Currency Held by the Public, and Deposits
at the Central Bank held by banks is equal to:
a.
b.
c.
d.
e.
bank reserves
the M1 money supply.
the monetary base.
the central bank’s international reserve assets.
bank capital
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13.
When a central bank intervenes in foreign exchange markets to prevent a
depreciation of its currency, the transaction it makes leads to _____ in the central bank’s
holdings of international reserve assets and _____ in the monetary base.
a.
b.
c.
d.
e.
an increase
an increase
a decrease
a decrease
none of the above.
a decrease
an increase
a decrease
an increase
14.
If a central bank wants to increase the monetary base, it ____ the discount rate,
resulting in _____ .
a.
b.
c.
d.
e.
raises
raises
lowers
lowers
raises
an increase in the money multiplier
an increase in the non-borrowed base
a decrease in the money multiplier
an increase in the borrowed monetary base (discount loans)
a decrease in the money multiplier
15.
The central bank is buying international reserve assets in the foreign exchange
market to regulate the value of its currency. If it does not want the domestic monetary
base to change, it will carry out a ____ open market operation. This open market
operation will involve _____.
a.
b.
c.
d.
e.
dynamic
defensive
dynamic
defensive
dynamic
buying domestic assets.
selling foreign assets
selling domestic assets
selling domestic assets
buying foreign assets
16.
A rise in the interest rate paid on checkable deposits can be expected to _____ and
_____.
a.
reduce the currency to deposit ratio
raise the money multiplier
b.
increase the currency to deposit ratio
raise the monetary base
c.
reduce the currency to deposit ratio
reduce the money multiplier
d.
increase the currency to deposit ratio
reduce the monetary base
e.
none of the above.
17.
A rise in the interest rate paid by the central bank on deposits of banks will ____
the excess-reserve-to-deposit ratio, and also cause _____ .
a.
b.
c.
d,
e.
increase
decrease
decrease
increase
increase
the money multiplier to increase
the money multiplier to increase
the money multiplier to decrease
the monetary base to decrease
the money multiplier to decrease
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18.
_____ is the principle obtained by applying the Law of One Price to bank
deposits. _____ is the principle obtained by applying the Law of One Price to a basket of
all goods and services.
a.
b.
c.
d.
e.
the interest rate parity condition
the purchasing power parity condition
the quantity theory of money
the interest rate parity condition
the capital asset pricing model
the quantity theory of money
the purchasing power parity condition
Gresham’s Law
Gresham’s Law
the purchasing power parity condition
19.
Whatever causes money demand (given a constant level of income) to increase
must also cause:
a.
an increase in the velocity of money
b.
a decrease in the foreign exchange value of the money.
c.
a decrease in the velocity of money
d.
a decrease in interest rates.
e.
an increase in the price level.
20.
The Quantity Equation says that the total nominal GDP of a country in a given
year is equal to:
a.
b.
c.
d.
e.
the velocity of money.
the money demand.
real balances.
the money supply multiplied by the velocity of money
the money supply.
Part III Extra Credit:
The Euro Crisis unfolding this year has been largely responsible for new heads of
government in 3 Eurozone countries in the past few weeks. Identify which of the
following photos shows:
1. Prime Minister of Greece _____
2. Evil Super-villain _____
Extra extra credit: Name:_______________
Extra extra credit: Name:_______________
3. Prime Minister of Italy _____ Extra extra credit: Name:_______________
4. Prime Minister of Spain _____ Extra extra credit: Name:_______________
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