Economics 470/570
Summer 1996
Midterm
I. Short Answer.
Answer five of the following seven questions. Each question is worth 8 points.
1. How do money and capital markets differ? List two money market instruments and two capital market instruments.
2. What is the definition of the monetary base? What are non-borrowed reserves?
3. What is the discount window and the discount rate? Who sets the discount
rate?
4. What is the Fisher equation? Does it define the ex-ante or the ex-post real rate of interest?
5. What is the speculative demand for money?
6. What are the three types of financial intermediaries? Give an example of each type.
7. Suppose that the required reserve ratio is 10%, the currency to deposit ratio is .25, the excess reserve to deposit ratio is .15, and the monetary base is 1,000. (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. Describe the three tools available to the Fed for controlling the money supply. What are the advantages and disadvantages of each tool?
2. Discuss the evolution of the payments system from barter to fiat money. How did banking arise?
3. What are the reasons for regulating financial markets? Discuss the types of regulations that have been imposed on financial markets.
4. Describe the Quantity Theory and Cambridge approaches to money demand. In what sense did Keynes follow in the Cambridge tradition? What did Baumol add?
5. How has the power structure of the Federal Reserve system shifted over time?
