* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download midterm exam 3
Survey
Document related concepts
Currency War of 2009–11 wikipedia , lookup
Business cycle wikipedia , lookup
Global financial system wikipedia , lookup
Great Recession in Russia wikipedia , lookup
Balance of payments wikipedia , lookup
Fractional-reserve banking wikipedia , lookup
Currency war wikipedia , lookup
International monetary systems wikipedia , lookup
Monetary policy wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Quantitative easing wikipedia , lookup
Interest rate wikipedia , lookup
Real bills doctrine wikipedia , lookup
Helicopter money wikipedia , lookup
Fear of floating wikipedia , lookup
Exchange rate wikipedia , lookup
Transcript
ECO 212 Fall 2010 Semester Midterm 3 Exam No. ________ Name: _______________________ ID #: ________________________ Part I Use the space provided or the back of the page if necessary. 1. Both Keynesian and classical economists agree that if wages and prices adjust rapidly, then the use of monetary policy to try to smooth out fluctuations in output and employment is unnecessary. Both types of economists agree that if wages and prices cannot adjust within a reasonable period of time, then the use of monetary policy makes sense. Suppose the economy’s adjustment of wages and prices to shocks takes place with time lags that are unpredictable in length – sometimes the adjustment is slow. Suppose the response of the economy to the effects of monetary policy (like lowering interest rates) takes place with time lags that are unpredictable in length – sometimes the impact is after a long lag. How would these two features affect the desirability of using monetary policy to try to counteract a business cycle slowdown? 2. Should a country with a history of high inflation -- as well as erratic and/or irresponsible government – adopt a fixed exchange rate? Discuss the arguments both for and against such a proposal. page 1 3. The recent global financial crisis exposed several weaknesses in the world’s financial system. One is that small countries (like Iceland and Ireland) can be the home of financial institutions that are not only “too-big-to-fail”, but also “too-big-to-rescue”. In the latter case, the cost of rescuing a large bank may be beyond the capability of the government. Some people think such cases require the creation of an “International Lender of Last Resort” (ILLR), that would rescue such financial institutions instead of the government. Given what we know about the advantages and disadvantages of a single country’s lender of last resort – what advantages and risks do you see in the proposal to create an ILLR? Would you be in favor? 4. The government of a country maintaining a fixed exchange rate is similar to a bank in several ways. A bank accepts deposits, and promises that those deposits can be turned back into cash. Most of the deposits are turned into illiquid assets. (The bank hopes/expects that not all depositors will withdraw funds at once.) If all the depositors rush to convert their deposits into cash, the bank will face a liquidity crisis, in which it may be unable to fulfill its promise without significant outside help. A government has illiquid assets, and promises that holders of its domestic currency can be converted into foreign exchange at a fixed rate. (The government hopes/expects that not all holders of currency will try to convert into foreign exchange at once.) If all holders of currency rush to convert their currency into foreign currency, the country will face a liquidity crisis, in which it may be unable to fulfill its promise without significant outside help. A bank can be rescued from a panic and liquidity crisis by a lender of last resort. Could a government be rescued from a panic by an ILLR? If so, who do you propose should fund/manage/direct the ILLR, and what regulatory or oversight authority should it have? page 2 Part II: Instructions: Select the best answer for each question and record your answer on the exam. 1. When domestic real interest rates rise, the foreign exchange value of the domestic currency ____; when domestic nominal interest rates rise because of a rise in the expected rate of inflation, the foreign exchange value of the domestic currency _____. a. b. c. d. e. appreciates depreciates depreciates appreciates none of the above. appreciates depreciates appreciates depreciates 2. An increase in the expected future exchange rate (# units of foreign currency per one unit of domestic currency) will: a. cause the demand for domestic assets and domestic currency to rise, and cause the domestic currency to appreciate. b. cause the demand for domestic assets and domestic currency to rise, and cause the domestic currency to depreciate. c. cause the demand for domestic assets and domestic currency to fall, and cause the domestic currency to depreciate. d. cause the supply of domestic assets and domestic currency to rise, and cause the domestic currency to depreciate. e. cause the supply of domestic assets and domestic currency to fall, and cause the domestic currency to depreciate. 3. The term capital mobility refers to: a. the absence of traffic congestion in a country’s major city. b. the concentration of employment opportunities that occurs in a country’s largest city. c. the absence of barriers to buying or selling foreign assets, or to foreigners buying or selling domestic assets. d. the ability of firms to move their manufacturing operations to countries (like China) that have lower wages. e. the ability of firms to replace high-wage domestic workers with low-wage foreign workers. 4. 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. intervention intervention sterilization raising lowering raising page 3 d. e. open market operations open market operations raising lowering 5. 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 interest rates foreign exchange rate foreign exchange rate domestic money supply domestic money supply foreign exchange rate holdings of international reserve assets domestic money supply foreign exchange rate domestic interest rates The following information relates to the next 2 questions: Iceland had the following transactions with the outside world in 2010: Exports of fish: Imports of oil: Repayment of old foreign debt: Remittances received from abroad: New borrowing from foreign lenders: Interest payments made on foreign debt: $200 $250 $300 $100 $350 $20 6. Iceland’s current account balance in 2010 is: a. b. c. d. e. + $30 -$50 +$50 +$70 -$30 7. Iceland’s official reserve transaction balance in 2010 is: a. b. c. d. e. + $30 -$50 +$80 +$70 -$80 8. If the velocity of money is unstable, then _____ is unstable and _____ is unstable. a. b. c. d. e. the LM curve the LM curve the IS curve the IS curve the IS curve the AD curve the AS curve the AS curve the AD curve the LM curve page 4 9. 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 money supply. the velocity of money. the money demand. real balances. the money supply multiplied by the velocity of money 10. The Keynesian Theory of Money Demand states that the motives for holding money include the: a. b. c. d. e. inflationary, precautionary, and investment motives. speculative, normative, and positive motives. transactions, savings, and investment motives. savings, spending, and precautionary motives. the speculative, transactions, and precautionary motives. 11. The diagrams above show 2 different ways a person could spend $1000 per month according to the Baumol-Tobin model. When the person switches from the method in graph (A) to the method illustrated in graph (B), this results in: a. b. c. d. e. an increase in spending. a fall in the interest rate. an increase in the velocity of money. an increase in money demand. a fall in nominal GDP. page 5 12. According to Milton Friedman’s Modern Quantity Theory, money demand depends inversely on rb – rm, where rb is the expected return on bonds and rm is the expected return on money. According to Friedman, when rb rises: a. b. c. d. e. money demand will rise. spending rises. competition among banks to attract deposits will cause rm to rise. rm will fall. the velocity of money will rise. 13. Modern monetary theory has identified other ways that expansionary monetary policy can affect nominal GDP – even if interest rates are not sensitive to changes in the money supply. These other ways include: (i) (ii) (iii) (iv) the bank lending channel the balance sheet channel the cash-flow channel the unanticipated price level channel a. b. c. d. e. only (i) is true. only (ii) is true. only (iii) and (iv) are true. only (i) and (iv) are true. (i), (ii), (iii), and (iv) are all true. 14. If investment spending by firms is unstable, then ____ will be unstable. Interest rates will tend to _____ during recessions. a. b. c. d. e. the LM curve the IS curve the IS curve the LM curve the AS curve rise fall rise fall rise 15. If recessions are caused by sudden and unexpected changes in money demand, then in a recession, interest rates will tend to _____, and the central bank should follow a _____ target. a. b. c. d. e. rise fall rise fall rise inflation exchange rate interest rate price level velocity page 6 16. According to the Keynesian Theory of Money Demand, money demand is sensitive to the level of interest rates because the _____ is sensitive to interest rates. a. b. c. d. e. transactions demand for money speculative demand for money precautionary demand for money excess reserve to deposit ratio currency to deposit ratio 17. The Quantity Theory of Money Demand states that the velocity of money should _________ . Actual data from the economy suggest that the velocity of money is __________. a. b. c. d. e. rise during recessions; fall during recessions; rise during recessions; remain fairly constant; none of the above. fall during recessions. rise during recessions. fairly constant. rise during recessions. 18. add: In order to find the monetary base on the central bank's balance sheet, one would a. b. c. d. e. loans to commercial banks plus central bank notes. loans to commercial banks plus deposits of government agencies. central bank notes plus deposits of banks at the central bank. international reserve assets plus loans to commercial banks none of the above. 19. “Interest Rate Targeting” is the monetary policy supported by economists who believe that the likely cause of recessions is: a. b. c. d. e. disruptions to the supply of labor. unexpected changes to the money supply. unexpected changes in technology. sudden changes in money demand. sudden changes to the willingness of businesses to invest. 20. 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. speculative precautionary transactions precautionary none of the above. the velocity of money would rise suddenly interest rates would rise the price level would rise output would fall page 7