Economics 470/570 - Monetary Theory and Policy

Homework 4

Economics 470/570
Winter 2005
Review Question Set for Week #4

Definitions

Monetary Base

Borrowed and Non-borrowed reserves

Operating targets

Intermediate targets

Monetary Policy Goals

Defensive and Dynamic Open Market Operations

Primary, Secondary, and Seasonal Credit

Short Answer

1. Derive the deposit and money multipliers when people hold currency and when banks hold excess reserves. Are the multipliers larger or smaller than the simple multiplier, i.e. when currency held and excess reserves are both zero? Explain.

2. Suppose that the required reserve ratio is 20%, the currency to deposit ratio is .25, the excess reserve to deposit ratio is .05, and the monetary base is 1,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 200. Use the money multiplier to find the new value of the money supply.

3. Using t-accounts, show that the Fed can increase the monetary base by (a) making discount loans to banks, (b) an open market purchase of government bonds from banks, or (c) an open market purchase of government bonds from an individual.

4. (a) Explain why the demand curve for reserves slopes downward. (b) Explain the shape of the supply curve for reserves.

5. Show that the Fed cannot simultaneously control bank reserves and the federal funds rate and therefore cannot adopt both as operating targets.

Essay

1. Suppose that a bank has $100,000 in excess reserves. Assuming that the required reserve ratio is 20%, use t-accounts to illustrate the multiple deposit creation process. Use this to obtain the simple deposit multiplier. Why are the deposit multiplier and the money multiplier the same when there is no currency and when banks loan out all excess reserves?

2. Explain how and why the money multiplier changes when (a) the required reserve ratio increases, (b) the currency to demand deposit ratio increases, and (c) the excess reserve to demand deposit ratio increases. Who determines each of these quantities?

3. What is meant by the phrase lender of last resort? Why is this important? Explain and show graphically how the Fed uses discount rate policy to act as a lender of last resort and how this limits the amount the federal funds rate can rise.

4. Describe the three tools available to the Fed for controlling the money supply. How do defensive and dynamic open-market operations differ? How do primary, seasonal, and secondary credit differ? What are the advantages and disadvantages of each tool?

5. What are the tools, operating targets, intermediate targets, and goals of Federal Reserve Policy? How are they related?

Homework 3

Economics 470/570
Winter 2005
Review Question Set for Week #3

Definitions

Asset

Liability

Demand Deposit

Bank Reserves

Reserve Requirement

Required Reserves

Excess Reserves

Short Answer

1. Write down the government budget constraint and explain each term.

2. Why is a demand deposit an asset for an individual, but a liability of the bank?

Essay

1. Show the t-accounts and the balance sheet for the following series of transactions. 

(i) Open a bank with 10 million dollars, put 3 million into buildings and equipment.

(ii) Put 2 million of the cash into T-bills.

(iii) Deposit 1.5 million into regional Fed bank.

(iv) Collect 4 million in deposits from other banks.

(v) Let the required reserve ratio be 20% and show what happens if the bank loans out all excess reserves.

Homework 2

Economics 470/570
Winter 2005
Review Question Set for Week #2

Definitions

FOMC

FAC

Discount window

Discount rate

Member bank

Federal Funds rate

Short Answer

1. What are the three types of financial intermediaries? What types of firms are in each category?

2. Briefly describe the major functions of Federal Reserve district banks.

3. Who is on the FOMC? What does the FOMC do?

Essay

1. What are the reasons for regulating financial markets? Discuss the types of regulations that have been imposed on financial markets.

2. Describe the structure of Federal Reserve districts and Federal Reserve banks.

3. Describe the structure and function of the Board of Governors of the Federal Reserve System.

4. How has the power structure of the Federal Reserve System shifted over time?

5. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed (we will discuss this part of the question next class).

Homework 1

Economics 470/570
Winter 2005
Review Question Set for Week #1

Definitions

Medium of exchange/Double coincidence of wants

Unit of account/Multiplicity of prices

Store of value/Liquidity

Financial intermediary

Direct and indirect finance

Liquidity

Short Answer

1. How is money measured? Why is there more than one definition of the money supply?

2. How do bonds and equities differ? Which is more risky?

3. How do bond and equity markets differ? How do primary and secondary markets differ? How do money and capital markets differ?

4. Explain how secondary markets determine the price of new securities and why they make new securities easier to sell. How do over-the-counter markets and organized exchanges differ?

5. List and briefly describe the various money market instruments.

6. List and briefly describe the various capital market instruments.

Essay

1. Why study of money? Why study banking? Why study financial markets?

2. What are the functions of money, i.e. why does money exist? Relative to a barter economy, what problems are overcome by the use of money?

3. Describe the main function of financial markets. Explain how direct finance and indirect finance differ. Among households, government, business, and the foreign sector, who are the biggest borrowers/lenders?

4. How do financial intermediaries, through their ability to pool resources promote more efficient use of financial resources? Be sure to cover risk pooling, the pooling of small investors, and pooling over time in your answer.

5. How do financial intermediaries reduce default risk, transactions costs, and matching costs?

Syllabus for Winter 2005

Monetary Theory and Policy

Course: Economics 470/570
Professor: Mark Thoma
Office/Hours: PLC 471 on M/W 12:00-1:00 p.m.
Phone/Email: (541) 346-4673, [email protected]
Web Page: http://mthoma.uoregon.edu/Economics470/

Text: Principles of Money, Banking, and Financial Markets, 11^th edition, by Ritter, Silber, and Udell, Pearson Addison-Wesley.

Prerequisites: Economics 313 or the equivalent.

GTF, Office Hours, Location, and Email Address:

Beilei Cai T/Th 12:00-1:00 PLC 537 [email protected]

Tests: There will be two midterm exams and a comprehensive final. The midterms will be given Monday, January24th and Monday, February 21st, and the final exam will be given on Monday, March 14th at 10:15 a.m. No make-up exams will be given. If you cannot take the midterms and the final exam on the scheduled dates, please do not sign up for the class.

Homework: Problem sets will be assigned periodically. These are not graded, but it is strongly recommended that you do them.

Grading: Grades will be assigned according to your relative standing in the class. The midterms are worth 30% each and the final is worth 40%.

Tentative Course Outline:

Introduction

Introduction (ch. 1 )

The Role of Money in the Macroeconomy (ch. 2, 4, pgs. 63-64)

Banks and Other Intermediaries

Financial Intermediation class notes

Central Banking and the Conduct of Monetary Policy

Structure of Central Banks and the Federal Reserve System (ch. 17)

Bank Reserves and the Money Supply (ch. 18)

The Instruments of Central Banking (ch. 19)

Monetary Policy Strategy (ch. 21)

Monetary Theory

The Classical foundations (ch. 22)

The Keynesian Framework (ch. 23)

The IS-LM Model (ch. 24)

Short-Run Stabilization Policy (ch. 25)

The AS-AD Model and Stabilization Policy (ch. 26)

Rational Expectations: Theory and Policy Implications (ch. 27)

Empirical Evidence on Monetary Policy Effectiveness (ch. 28)