Download 3 - GCC

MACROECONOMICS - EXAM III
Fall 2004
1.
G. Garesché
a. Define the unemployment rate. What was the unemployment rate in October?
b. Define statistical bias. Give an example of a statistical bias in the measurement
of the unemployment rate? Explain why it is a statistical bias.
c. How does the Bureau of Labor Statistics acquire the information to calculate the
unemployment rate? Be specific.
d. Define cyclical, structural and frictional unemployment and give an example of
each.
e. Explain why structural unemployment is good for the economy but particularly
bad for an individual who is affected by it.
f. The unemployment rate is a countercyclical and lagging indicator. Tell me what
each of those labels means.
2.
a. What three functions must money fulfill to be money? Explain why a
hyperinflation destroys a currency’s ability to fulfill all of its required functions.
b. Why isn't a credit card money? In what sense does money act as a lubricant or
oil for an economy?
c. Define M1 and M2. Define liquidity. What is meant when an asset is described
as perfectly liquid?
d. Explain thoroughly why even a moderate inflation rate of 10-12% is bad for the
long run health of the economy.
3.
a. Why are banks and insurance companies called financial intermediaries? In
what sense do banks borrow on a short term basis and lend on a long term basis. Why
did this cause problems for Savings & Loans during the 1970s? (Explain thoroughly).
b. When calculating the profit of a bank, what is the source of the revenue of the
bank?
c. Show the four most important items which would be part of a bank's balance
sheet on the t-account below.
d. If borrowers default on bank loans, where, specifically, does the money come
from to repay depositors? At what point is a bank insolvent, or, in other words, bankrupt?
e. Why might a bank find it necessary to borrow money for short periods of time,
even if it is solvent? If a bank borrows from the Fed, what is the process called? What is
the name of the interest rate at which banks borrow from the Fed?
f. From where do banks prefer to borrow on an over-night basis when they choose
not to borrow from the Fed? What is the name of the interest rate at which they would
borrow in that market?
4.
a. What are Eurodollars?
b. There is not enough gold in Fort Knox to back each U.S. dollar. So, why does
the U.S. dollar have value?
c. Explain what the FDIC does.
d. What is a bank run? Under what circumstances did they occur? Why don't they
occur any more?
e. What are the three main policy tools the Fed can use to change the money
supply? What would the Fed do to decrease the money supply with each tool.
f. What is the Fed's preferred way to change the money supply? Why does this
method give the Fed an income that makes it financially independent of the Congress?
5.
a. Why are the members of the Federal Reserve Board of Governors given 14 year
terms?
b. List six responsibilities or functions of the Fed with respect to the banking system
and the economy?
c. Why is it accurate to call the Fed the bank of the banking system?
d. Why does the Federal Reserve System have twelve regional federal reserve
banks? In what city is Arizona's regional federal reserve bank?
e. What is the Fed’s goal, when it carries out stimulatory or expansionary monetary
policy? Why is stimulatory monetary policy often described as "pushing on a string"?
f. What portion of the money supply does the Fed directly control? What makes up
this part of the money supply?
6.
a. Who is the current chairman of the Fed?
b. Assuming the Fed injects $1000 into the economy and that the reserve
requirement is 4%, lay out a table that shows how the banking system creates money
through its intermediation (accepting deposits and making loans).
c. Assuming a 2.5% reserve ratio, calculate the deposit multiplier. (Show your
work). If the Fed sells $10 billion worth of bonds, what does the deposit multiplier suggest
the effect on the money supply would be?
d. Define the money multiplier.
e. Why are the deposit multiplier and the money multiplier different? Which is
larger? In which would the Fed be more interested? Why?
7.
a. What is the Fed's preferred method of putting additional money into the
economy? What is the name of the group in the Fed that makes decisions about changing
the money supply in this way? Who are the members of this group?
b. About a week ago the Fed raised its target interest rate for the second time in
recent months by reducing the money supply. Specifically, how would they have done
this? Using the graphs below of the credit market and AD/AS, show the effect of this
policy? What effect on the economy is the Fed trying to achieve?
c. When was the Classical model used?
d. What are the main features of the Classical model?
8.
a. What did the Classical economists feel was the proper role of government with
respect to the economy?
b. What do we mean when we say that the Classical economists believed that the
economy was a self-correcting mechanism? What evidence did they have that made them
believe this?
c. Define investment. Why might businesses consider investing during a
recession? What are firms that invest during a recession assuming about the future?
d. Write the equation of exchange. Identify each of the variables in the equation of
exchange.
e. Define the velocity of money.
f. What did the Classical economists feel would be the result of an increase in the
money supply? Why would this mean they would never attempt monetary policy?
g. What proportion of their income did the typical family save at the turn-of-thecentury? Why is it, in fact, reasonable that the typical American family saves a much
smaller proportion today?
10.
e. Define a speculative bubble. What two conditions are necessary for a
speculative bubble to occur? What evidence is there that the U.S. stock markets may
have been experiencing a speculative bubble during the 1990s?
f. What is a bank run? Why don't they happen in the U.S. anymore?
f. In the early 1930s there was a large number of bank failures in this country. What
made this happen? Explain the effect this had on households' consumption/saving
decision. Why did this make output plunge? About how much lower was output in 1933
than it had been in 1929?
7.
a. Write the equation of exchange. Identify each of the variables in the equation of
exchange.
b. Define the velocity of money.
c. What is necessary to make the equation of exchange into the Classical Quantity
Theory of Money? What assumptions did the Classical economists make about the
behavior of velocity and real GDP?
d. What did the Classical economists feel would be the result of an increase in the
money supply? Why would this mean they would never attempt monetary policy?