Economics 470/570
Spring 2000
Midterm
I. Short Answer: Answer four of the following five questions. Each question is worth 8 points.
1. What are the three types of financial intermediaries? Give an example of each type.
2. Suppose that the excess reserve to deposit ratio increases. Explain how this will affect the money supply.
3. What is the federal funds rate?
4. Explain why the price of bonds and the interest rate are inversely related.
5. Explain the difference between direct and indirect finance.
II. Essay Questions: Answer each of the following four questions. Each question is worth 17 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. Discuss the transactions, precautionary, and speculative motives for holding money in Keynes liquidity preference theory. When all three motives are put together, what theory of money demand results?
3. 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?
4. Discuss the evolution of the payments system from barter to fiat money. How did banking arise?
