Project #90417 - About 20 questions SMALL BUDGET





7A 1,2,3,4

1) In the fall of 2002 the Fed voted to decrease the federal funds rate target on several different occasions, reducing it from 3% to 1.75%. What action in the "open market" would the Fed's trader have had to take, other things equal, in order to induce this decrease in the federal funds rate? (you do not need to give a specific numerical answer).

2) Draw a supply-demand diagram of the Federal funds market which illustrates the effects of a massive treasury bill sale by the Fed in the open market.

3) If banks desire to increase their lending, but the Federal Reserve is not adding reserves to the banking system, what will happen to the level of short term interest rates? Explain your answer carefully.

4) "Sweep" accounts are combination checking/money market accounts which large banks currently offer to their corporate customers. These accounts sweep just enough funds out of the money market portion of the account to prevent checks written on the checking part of the account from bouncing. Suppose that banks suddenly made these accounts available to households. Draw a supply/demand diagram of the federal funds market to show the effect on the federal funds rate if the Fed did nothing. What action in the open market would the Fed have to take to maintain its existing interest rate target under these circumstances?


7B 7

7) Bond rating agencies such as Moody's publish rankings of the credit quality of corporate borrowers. AAA rated corporations have the lowest level of default risk followed by AA and A the Baa, etc. Under what circumstances would the spreads between yields on bonds issued by 'B' rated corporations and yields on AA rated corporate bonds widen noticeably?

8A 2

2) Explain why monetary policy makers believe that it is important to start restraining growth in aggregate demand before there is a noticeable increase in the CPI.

8B 1,3,4,5,7

1) "A balance of trade deficit must always be offset by net capital inflows from abroad." Agree or disagree with this statement and explain.

3) Draw a supply-demand diagram of the foreign exchange market for the dollar (valued in euros/$) Show the effects of the following events on the exchange rate. Explain your reasoning!

a) The release of data showing stronger than expected RGDP growth in Germany.

b) An increase in the federal funds rate by the Federal Reserve

c) An announcement that U.S. trade deficits for the last quarter were much larger than previously expected

d) A larger than expected increase in hourly wage rates in the US.

4) If the Fed wished to defend the exchange rate of the $ (i.e. prevent the $ exchange rate from falling) what policy action could it take? Explain.

5a) What is the "purchasing power parity" theory of exchange rates? If the price of a representative bundle of tradable goods is currently $5000 in the U.S. and 550000 yen in Japan, is the $ undervalued or overvalued when the exchange rate is 90 yen per $?

5b) Why don't actual exchange rates move to purchasing power parity levels in the short run?

7) How are the expectations  of foreign private sector investors about future $ exchange rates likely to affect prices of US Treasury securities? Explain.


9A 1,2,3,5

1) One cornerstone of President George W. Bush's economic policy during his first term in office was tax cuts targeted towards high income and high net worth households. Under his proposals the marginal tax rate applied to capital gains taxes were reduced, taxes on stock dividends were eliminated and marginal tax rates on wage and interest income, particularly those applied to high income brackets were also reduced.

a) What would be the short-run effects of tax cuts on interest rates and growth in RGDP given that the economy was in recession at the time of Bush’s tax cuts?  Contrast the Keynesian and crowding out perspectives on this question.

b) If in question (a) we were interested in the long run effects of the proposed tax cuts would a "supply side" economist give a different answer to this question than an economist who believed that federal budget deficits created significant "crowding out" effects? Explain.

2) "Market Slump Helps Sell Tax Cuts Now." (Headline from fall 2000) Explain from the standpoint of Keynesian macroeconomic theory why the slump in the stock market that began in the spring of 2000 help build support for Bush's tax cut proposal in his first year in office

3) Do you think the Fed would welcome a noticeable decline (10%-15%)  in the exchange value of the $ over the next 6 months? Explain your answer carefully.


5) Why do think the European Union countries decide to have a single central bank and a single currency, instead of just agreeing to maintain fixed exchange rates among their currencies?


9B 1,3,4,6,7

1) What policy rule do monetarists believe the Fed should follow? What are the major assumptions underlying this policy prescription?

3) Why would you expect the velocity of circulation of a monetary aggregate such as M1 or M2 to rise during periods of high interest rates and to decline during periods of low interest rates?

4) Suppose that long term interest rates in the economy were increasing due to strong economic growth and demand for loans in the world economy. Meanwhile suppose that the Fed was holding down its federal funds rate target. What would probably be happening to M2 velocity? Explain your answer.

6) Those who advocate that the Fed target monetary aggregates, usually argue that the Fed should not alter its monetary targets in response to temporary changes in macroeconomic conditions, yet those who advocate interest rate targeting never recommend that the Fed maintain a constant federal funds rate target. Why not? (What's the potential danger of maintaining a rigid interest rate target?)

7) If excessively rapid growth in the money supply is associated with all inflationary episodes, why do central banks ever allow the money supply to increase so rapidly?



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Due By (Pacific Time) 11/01/2015 12:00 am
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