Economics 470/570
Spring 2004
Midterm
Part I - Definitions. Define each of the following (3 points each, 30 points
total).
1. Discount rate
2. Open market operation
3. LM curve
4. Non-borrowed reserves
5. Velocity
6. Transactions demand for money
7. Partially backed paper money
8. Bank Reserves
9. Autonomous expenditures
10. Liquidity
Part II - Short Answer. Answer THREE of the following questions (8 points each, 24 points total).
1. What properties must money satisfy in order to be useful?
2. Who is on the FOMC? What does the FOMC do?
3. Explain why the demand curve for reserves slopes downward.
4. Derive the LM curve graphically and explain intuitively why the LM curve slopes upward.
Part III – Essays and problems. Answer THREE of the following questions (15
points each, 45 points total)
1. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed.
2. Explain intuitively and show graphically how the quantity of reserves and the FF rate are affected by (a) open-market operations, (b) discount loans, and (c) changes in reserve requirements.
3. 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?
4. (a) Show that a decrease in taxes causes the IS curve to shift out using a 45 degree line diagram and an IS curve diagram. (b) Show graphically and explain intuitively how the slope of the IS curve changes when the responsiveness of investment to the interest rate (Ii) increases. A detailed mathematical answer can be substituted for the graphical analysis.
