These are homework/review questions for the first exam. The list is extensive - it covers all the topics we covered in class (some of which we will cover next week). Knowing these questions well is a good study guide for the exam.
Definitions
Medium of exchange/Double coincidence of wants
Unit of account/Multiplicity of prices
Store of value/Liquidity
Liquidity
FOMC
FAC
Discount window
Discount rate
Member bank
Board of Governors
Monetary base
Borrowed and Non-borrowed reserves
Federal funds rate
Asset
Liability
Demand Deposit
Bank Reserves
Reserve Requirement
Required Reserves
Excess Reserves
Currency
Lender of Last Resort
Money multiplier
Dynamic and defensive open-market operations
Primary, secondary, and seasonal credit
Essay
1. What are the functions of money, i.e. why does money exist? Relative to a
barter economy, what problems are overcome by the use of money?
2. To be useful as a medium of exchange, what properties should money have?
3. Describe the evolution of money from barter to fiat money. How did paper
money arise?
4. How is money measured? Why is there more than one definition of the money
supply? Are data on the money supply reliable?
5. How do nominal interest rates, ex-ante real interest rates, and ex-post
real interest rates differ? Of the two real rates, which is the most important
for understanding economic decisions?
6. Briefly describe the major functions of Federal Reserve district banks.
7. How do member banks differ from other banks? How did the difference change
in 1980?
8. Who is on the FOMC? What does the FOMC do?
9. Describe the structure of Federal Reserve districts and Federal Reserve
banks.
10. Describe the structure and function of the Board of Governors of the
Federal Reserve System.
11. How has the power structure of the Federal Reserve System shifted over
time?
12. 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.
13. Write down the government budget constraint and explain each term.
14. Use t-accounts to show that the Fed can control the monetary base better
than it can control either currency or reserves. What does this result tell us?
15. Suppose that a bank has $100,000 in excess reserves that it loans out.
Assuming that the required reserve ratio is 20%, use t-accounts to illustrate
the multiple deposit creation process. Use this to obtain the simple deposit
multiplier.
16. Suppose that the required reserve ratio is 20%, and the monetary base is
1,000. (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.
17. Derive the money multiplier when people hold currency and when banks hold
excess reserves. Is the multipliers larger or smaller than the simple money
multiplier, i.e. when currency held and excess reserves are both zero? Explain.
18. Suppose that the required reserve ratio is 20%, the currency to deposit
ratio is .25, the excess reserve to deposit ratio is .05, and the monetary base
is 1,000. (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.
19. Explain how and why the money multiplier changes when (a) the required
reserve ratio increases, (b) the currency to demand deposit ratio increases, and
(c) the excess reserve to demand deposit ratio increases. Who determines each of
these quantities?
20. (a) Explain why the demand curve for reserves slopes downward. (b)
Explain the shape of the supply curve for reserves.
21. Use the supply and demand model for bank reserves to explain and
illustrate the effects of (a) an open market operation to buy bonds, (b) a
decrease in the discount rate, and (c) an increase in required reserves.
22. Describe the three tools available to the Fed for controlling the money
supply. How do defensive and dynamic open-market operations differ? How do
primary, seasonal, and secondary credit differ? What are the advantages of
open-market operations relative to the other tools?
23. What is meant by the phrase lender of last resort? Why is this important?
Explain and show graphically how the Fed uses discount rate policy to act as a
lender of last resort and how this limits the amount the federal funds rate can
rise.
