Economics 470/570
Winter 2003
Dr. Thoma
Midterm
Answer each of the following questions (20 points each).
1. 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 emerges?
2. What are the functions of money? Relative to a barter economy, what problems are overcome by the use of money? What properties must money satisfy in order to be useful?
3. Derive the money multiplier when the public is allowed to hold currency and banks are allowed to hold excess reserves. Explain how the money multiplier changes when (a) the required reserve ratio increases, (b) the currency to deposit ratio increases, and (c) the excess reserve to deposit ratio increases. What factors determine the quantity of excess reserves held by banks?
4. 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.
5. Explain why the demand curve for reserves slopes downward. Explain why the supply curve for reserves slopes upward. Explain 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.
