Economics 470/570
Summer 1999
Midterm
I. Short Answer: Answer five of the following seven questions. Each question is worth 8 points.
1. What is the Fisher equation? Does it describe the ex-ante or ex-post real interest rate?
2. Why is currency in circulation listed as a liability on the Federal Reserve's balance sheet?
3. What are secondary markets? Why are they important? Give two examples of secondary markets for financial assets.
4. Explain intuitively why the IS curve slopes downward.
5. How reliable are data on the money supply?
6. What are non-borrowed reserves? How well can they be controlled by the Fed?
7. Suppose that the required reserve ratio is 15%, the currency to deposit ratio is .20, the excess reserve to deposit ratio is .05, and the monetary base is 20,000. (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.
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. Using T-accounts, show that the Fed can increase bank reserves by making discount loans to banks, by purchasing government bonds from banks, or by purchasing government bonds from individuals. Explain intuitively how the creation of reserves leads to multiple deposit creation in banks.
3. Describe the structure and function of the Board of Governors of the Federal Reserve System. What role does the Board of Governors play on the FOMC?
4. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?
5. Describe the three tools available to the Fed for controlling the money supply. What are the advantages and disadvantages of each tool?
