Money and Banking Questions

Money and Banking Questions

1. If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is
the velocity of money?
a. 0.33
b. 3
c. 5.63
d. 300,000
2. The Taylor rule implies that the nominal federal funds rate should be increased if there is a
___________ output gap or a ____________ inflation gap.
a. positive; positive
b. positive; negative
c. negative; positive
d. negative; negative
3. Describe time inconsistency and explain how it can be avoided by a central bank setting monetary
policy.
4. Suppose the federal funds rate is 4.4 percent and you know that the Fed is following the Taylor rule.
You don’t know the Fed’s inflation target, but the equilibrium real interest rate is 4 percent, the inflation
rate is 3 percent, the weight on the GDP gap is 0.4, the weight on the inflation gap is 0.6 and nominal
GDP is 2 percent points below its target. Calculate the Fed’s inflation target from this information.
5. The cost that firms incur to change prices is referred to as
a. menu costs.
b. inflation tax.
c. pseudo costs.
d. transaction costs.
6. In case of positive inflation rates,
a. both borrowers and lenders of fund lose out.
b. both borrowers and lenders of fund gain.
c. lenders of funds gain, while borrowers lose out.
d. borrowers of funds gain, while lenders lose out.
7. If actual output is denoted y and potential output is denoted y*, the output gap is
a. [(y – y*)/ y*] × 100.
b. [(y – y*)/ y] ×100.
c. [(y* – y)/ y*] × 100.
d. [(y* – y)/ y] × 100.
8. Okun’s Law relates
a. the unemployment gap and the inflation rate.
b. the unemployment gap and the inflation gap.
c. the inflation gap and the output gap.
d. the unemployment gap and the output gap.
9. The inflation surprise is defined as
a. the sum of the natural rate of unemployment and the ideal inflation rate.
b. the difference between the actual inflation rate and the expected inflation rate.
c. the expected inflation rate in an economy multiplied by the population of the economy.
d. the non-accelerating inflation rate of unemployment (NAIRU).
10. Why is there an effectiveness lag for monetary policy?
11. What are the five major costs of anticipated inflation?
In the fourth quarter of 1982, economic statistics showed the following:
Real GDP $5,189.8 billion
Unemployment rate 10.7%
Inflation rate 4.4%
The conceptual variables corresponding to these data are:
Potential Output $5,640.3 billion
Natural rate of unemployment 6.1%
Ideal inflation rate 1.0%
a. Calculate the output gap in percentage points. Show your work.
b. Calculate the unemployment gap in percentage points. Show your work.
c. Calculate the inflation gap in percentage points. Show your work.
d. Calculate the output loss and the inflation loss. Show your work.
12. Answer the questions below on the basis of the following data.
Actual inflation Expected inflation
Point A: 2% 2%
Point B: 4% 4%
Point C: 2% 4%
Point D: 4% 2%
a. Suppose the equation describing the Phillips curve is
p = pe – 2(U – 5).
For each of the points: A, B, C, and D, calculate the unemployment rate.
b. Based on the equation in part a, what is the numerical value of the natural rate of unemployment?
13. If the federal funds rate equals the primary credit discount rate, the Fed is likely to ___________
securities in the open market, which will cause the federal funds rate to ________ .
a. buy; increase
b. buy; decrease
c. sell; decrease
d. sell; increase
14. A bank has reserves of $34.3 million, securities of $65.2 million, and loans of $287.5 million. It has
transaction accounts totaling $357.7 million and capital of $29.3 million. The reserve requirement is 0
percent on the first $7 million of transaction accounts, 3 percent on transaction accounts from $7 million
to $47 million, and 10 percent on transaction accounts above $47 million.
a. Draw up the bank’s balance sheet and calculate the bank’s excess reserves.
b. Suppose the bank makes a loan equal to the amount of its excess reserves that you calculated in part
(a). Draw up the bank’s balance sheet before the customer spends the proceeds of the loan. What are
the bank’s excess reserves?
c. Now suppose the customer spends the proceeds of the loan. Draw up the bank’s balance sheet and
calculate its excess reserves.
15. If the ratio of currency to transaction accounts is 1, the ratio of nontransaction accounts to
transaction accounts is 6, the ratio of retail money-market funds to transaction accounts is 2, the ratio
of required reserves to transaction accounts is 0.07, and the ratio of excess reserves to transaction
accounts is 0.02, calculate the M1 multiplier and the M2 multiplier.
16. Suppose the Fed’s Open-Market Desk thinks the downward-sloping portion of the demand for
reserves is given by the equation
D = 28 – (3 × i),
where i is the federal funds rate in percent and D is expressed in billions of dollars. Suppose the Fed
is currently supplying $26.5 billion in nonborrowed reserves. There are no secondary or seasonal credit
discount loans. The primary credit discount rate is currently set at 2 percent and the interest rate on
reserves is 0.30 percent. The Fed’s target for the federal funds rate is 1 percent.
a. Does the Desk need to change the supply of reserves in the market? How much
does it need to add or withdraw from the market? After carrying out its daily actions,
what will be the equilibrium amount of reserves and discount loans?
b. Suppose the demand curve for reserves shifts to
D = 35 – (3 × i).
The Fed does not realize that the demand curve has shifted, so it keeps the supply of
nonborrowed reserves at the level you determined in part a. Calculate the equilibrium
federal funds rate, reserves, and the amount of primary credit discount loans.
17. Discuss the effectiveness of a monetary policy in an economy in which banks are indifferent between
holding bonds and holding cash as reserves.
18. The discount rate is the
a. targeted inflation rate for an economy.
b. ongoing taxation rate in an economy.
c. interest rate that the Fed charges on the loans it makes.
d. nominal interest rate charged by financial intermediaries when they advance loans.
18. Open-market operations are purchases and sales of
a. government securities in the secondary market.
b. government securities in the primary market.
c. corporate bonds in the secondary market.
d. corporate bonds in the primary market.
19. Which of the following statements is true?
a. If the Fed wants to decrease money supply, it buys government securities.
b. If the Fed wants to increase money supply, it buys government securities.
c. If the Fed wants to decrease money demand, it buys government securities.
d. If the Fed wants to increase money demand, it buys government securities.
20. Primary government securities dealers are _________ that meet certain capital requirements and
agree to actively transact with the Fed when it engages in open-market operations.
a. small investment banks and brokers
b. large stockbrokers
c. large investment banks and brokers
d. community banks and credit unions
21. Which of the following statements is true?
a. The Fed does not need to rely on the Government for its operating funds.
b. Open market operations can be used by the Fed only to tighten monetary policy and not
to ease it.
c. The Board of Governors of the Fed is headed by the President of the United States.
d. The operations of the Fed are deeply dependent on the actions of the ruling political power.
22. When a central bank is not independent, the main economic variable that is affected is
a. unemployment.
b. output growth.
c. inflation.
d. consumption spending.
23. What are the central banking functions that a Federal Reserve Bank performs?
24. Consider the bond market to be in equilibrium according to our complete theory of the term
structure of interest rates. The current interest rate on one-year bonds is 2 percent, and you believe, as
does everyone in the market, that in one year the interest rate on one-year bonds will be 3 percent, and
in two years, the interest rate on one-year bonds will be 4 percent. That is, using our standard notation,
= 2%, = 3%, and = 4%.
Assume that there is no term premium on a one-year bond.
a. According to the expectations theory of the term structure of interest rates, what will the interest
rate be today on a two-year bond and a three-year bond?
b. Calculate the interest rate today on the two-year bond and the three-year bond, incorporating the
term premium.
25. Which of the following is true of the yield curve?
a. The yield curve is steep and is upward sloping when the recession ends and the economy starts to
recover.
b. The yield curve is flat and is downward sloping when the recession ends and the economy starts to
recover.
c. The yield curve is flat or inverted when the term premium is small.
d. The yield curve is downward sloping when the term premium is large.
26. Which of the following is true of the analysis of the term structure of interest rates?
a. It assumes that investors in long-term securities face high transaction costs.
b. It assumes that investors can predict short-term interest rates accurately.
c. It assumes that the yield curve is always flat.
d. It assumes that investors in bonds have a preferred habitat.
27. If the nominal interest rate was 4 percent, the expected real interest rate was 3 percent, and the
realized real interest rate was 5 percent, then the expected inflation rate was and the realized
inflation rate was .
a. -1 percent; 1 percent
b. -1 percent; 2 percent
c. 1 percent; -1 percent
d. 1 percent; 1 percent
28. The president of the United States is considering two different candidates to chair the Federal
Reserve. If he chooses Alan, the probability that inflation will be 2 percent is 0.4 and the probability
that inflation will be 4 percent is 0.6. If the president chooses Ben, the probability that inflation will
be 2 percent is 0.6 and the probability that inflation will be 3 percent is 0.4. If you are an investor with
your funds invested in bonds paying 7 percent, calculate the standard deviation of your real return if
Alan is chosen to chair the Fed and if Ben is chosen to chair the Fed. Which candidate would you
prefer? Explain why.
29. Which of the following statements correctly identifies a difference between a stock exchange and
a stock index?
a. A stock exchange refers to a market where stocks of government-owned enterprises are traded,
while a stock index refers to a market where the stocks of privately-owned enterprises are traded.
b. A stock index refers to a market where stocks of government-owned enterprises are traded, while a
stock exchange refers to a market where the stocks of privately-owned enterprises are traded.
c. A stock exchange refers to a market where stocks are traded, while a stock index reflects the
average price of a collection of stocks.
d. A stock index refers to a market where stocks are traded, while a stock exchange reflects the
average price of a collection of stocks
30. Identify the correct statement from the following.
a. Dividend payments are subject to taxes while realized capital gains are not.
b. Realized capital gains are subject to taxes while dividend payments are not.
c. Both dividend payments and realized capital gains are subject to taxes.
d. Neither dividend payments nor realized capital gains are subject to taxes.
31. When the existence of a contract changes the behavior of a party to the contract, the problem is
called
a. irrational expectations.
b. adverse selection.
c. opportunity cost.
d. moral hazard.
32. A bank offers credit cards with a 25 percent interest rate, when its competitors’ cards have just a 15
percent interest rate. Despite the high rate, the bank finds itself losing money because many of its
customers fail to repay the balances on their cards. The bank’s losses are most likely to have occurred
because of
a. bad management.
b. the lock-in effect.
c. redlining.
d. adverse selection.
33. Accounting rules require that a bank’s ______ equals its ________.
a. equity capital; assets plus liabilities.
b. assets; liabilities minus equity capital.
c. liabilities; assets plus equity capital.
d. liabilities; assets minus equity capital.
34. To oppose the Glass-Steagall Act, banks argued that they
a. would be forced to extend deposit insurance coverage to firms that were not banks.
b. would have a conflict of interest between their needs to underwrite stocks and to serve their
customers.
c. could gain greater monopoly power by lending only to big businesses.
d. could take advantage of economies of scope if they were able to underwrite securities and sell them
directly to their customers.
35. On September 1, 2012, Al buys a bond for $15,000 that makes coupon payments of $750 after
each of the following three years and returns its principal of $15,000 at the end of the three years. In
other words, it is a standard coupon bond with a 5 percent annual interest rate making payments once
each year.
On September 1, 2013, Al receives his first coupon payment of $750. At that time, the market interest
rate on bonds like Al’s has risen to 6 percent. Al sells his bond to Biff at that time, for a price equal to
the present value of the bond’s payments.
a. How much does Biff pay Al for the bond?
b. Calculate Al’s current yield, capital-gains yield, and total return for the year.
On September 1, 2014, Biff receives a coupon payment of $750. The market interest rate on bonds
like his remains 6 percent. Biff sells his bond to Cass at that time, for a price equal to the present
value of the bond’s payments.
c. How much does Cass pay Biff for the bond?
d. Calculate Biff’s current yield, capital-gains yield, and total return for the year.
On September 1, 2015, Cass receives a coupon payment of $750 and the principal of $15,000. Over
the course of the year (between September 1, 2014, and September 1, 2015), the market interest rate
on bonds like his rose to 7 percent. But Cass decided to keep the bond.
e. What is Cass’s total return for the year?
36. On February 1, 2013, Janet buys a bond for $10,000 that makes coupon payments of $600 after
each of the following two years and returns its principal of $10,000 at the end of the second year. In
other words, it is a standard coupon bond with a 6 percent annual interest rate making payments once
each year.
On February 1, 2014, Janet receives her first coupon payment of $600. At that time, the market
interest rate on bonds like hers has fallen to 4 percent. She sells her bond to Justin at that time, for a
price equal to the present value of the bond’s payments.
a. How much does Justin pay Janet for the bond?
Both Janet and Justin have tax rates of 30 percent on interest income and 20 percent on capital gains.
(Note that if someone has a capital loss, you may assume that he or she can reduce taxes by the
amount of the capital loss times the tax rate of 20 percent.)

b. Calculate Janet’s after-tax rate of return for the past year (from Feb. 1, 2013, to Feb. 1,
2014).
Justin holds onto the bond from February 1, 2014, to February 1, 2015, so it matures and he receives
the second coupon payment and the principal.
c. What is Justin’s after-tax rate of return for the year from Feb. 1, 2014, to Feb. 1, 2015?
Explain and show all your work for each part. You may assume, of course, that the market works and
does not malfunction.
37. If money is gold or silver, it is called _______ money
a. fiat
b. inside
c. commodity
d. glitter
38. Under the fiat money system, the revenue that the government makes on every coin issued is
referred to as
a. fiat revenue.
b. full-bodied revenue.
c. money tax.
d. seignorage revenue.
39. The financial system consists of
a. all the securities, intermediaries, and markets that exist to match savers and borrowers.
b. all transactions occurring in the goods market during a financial year.
c. all markets that exist to match the buyers and suppliers of various factors of production.
d. all transactions involving the government.
40. Another name for an equity security is
a. bond.
b. debt.
c. option.
d. stock.
41. Suppose the quantity demanded for a security is
BD = 150 – 0.1b,
and the quantity supplied of the security is
BS = 50 + 0.1b,
where b is the price of the security in dollars. Suppose that the supply curve shifts to
BS = 75 + 0.1b.
The equilibrium quantity of the security
a. rises by 12.5.
b. rises by 2.5.
c. falls by 2.5.
d. falls by 12.5.

FOR YOUR ASSIGNMENTS TO BE DONE AT A CHEAPER PRICE PLACE THIS ORDER OR A SIMILAR ORDER WITH US NOW