Economics 470/570
Summer 1995
Midterm
I. Short Answer. Answer five of the following seven questions. Each question is worth 8 points.
1. What is the announcement effect?
2. What is the federal funds rate?
3. Define the transactions demand for money.
4. What is the difference between the ex-ante and ex-post real interest rates?
5. What is the theoretical definition of money?
6. What is the FOMC? Who is on the FOMC?
7. Suppose that the required reserve ratio is 8%, the currency to deposit ratio is .20, the excess reserve to deposit ratio is .02, and the monetary base is 5,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 100. Use the money multiplier to find the new value of the money supply.
II. Essay Questions. Answer four of the following five questions. Each question is worth 15 points.
1. What are the three functions of money? Describe the problems that are overcome by the use of money. What properties must money satisfy in order to be useful?
2. When using open-market operations, does the Fed have better control over the monetary base or bank reserves? Explain. Why can't the Fed control the money supply perfectly?
3. What are financial intermediaries? How do they promote the efficient use of financial resources?
4. How independent is the Fed? What factors contribute to the independence of the Fed? What factors work against independence? Discuss the arguments for and against the independence of the Fed.
5. Discuss the contributions of the Cambridge economists and Keynes to the theory of money demand.
