Economics 470/570
Summer 1998
Midterm
I. Short Answer. Answer five of the following seven questions. Each question is worth 8 points.
1. What is the federal funds rate?
2. Explain intuitively why the LM curve is positively sloped.
3. What are the three types of financial intermediaries? Give an example of each type.
4. How is M1 defined? Why might this definition be too narrow?
5. Explain the difference between direct and indirect finance.
6. What is the discount window and the discount rate? Who sets the discount rate?
7. Suppose that the currency to deposit ratio increases. Explain how this will affect the money supply.
II. Essay Questions. Answer four of the following five questions. Each question is worth 15 points.
1. 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.
2. Describe the Quantity Theory and Cambridge approaches to money demand. In what sense did Keynes follow in the Cambridge tradition? What did Baumol add?
3. Explain how financial intermediaries bring about more efficient use of financial resources.
4. 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?
5. Show that the Fed can control the monetary base better than it can control reserves. Can the Fed control the monetary base perfectly? Why or why not?
