310_PracticeExam2_Winter 2008

310_PracticeExam2_Winter 2008 - 1 of 10 Economics 310 Money...

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1 of 10 Economics 310 Money and Banking Practice Exam 2 Winter 2008
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2 of 10 1. Financial commentators often interpret an inverted yield curve as a sign of impending recession because: (a) it implies that short term interest rates are likely to rise, and this will reduce investment; (b) it implies that short term interest rates are likely to fall, and this will reduce investment; (c) it implies that the central bank is liable to raise interest rates, and slow down the economy; (d) it implies that the central bank will be forced to reduce interest rates significantly in order to stimulate economic activity; (e) it implies that the liquidity or interest risk premium is falling, which only happens in periods of increased economic instability. 2. In the Federal funds market, (a) The overnight interest rate is determined explicitly by the discount rate chosen by the Fed. (b) Supply comes solely from open market operations of the Fed. (c) Demand is not responsive to the interest rate, as it reflects only the banks’ need to satisfy reserve requirements (which are independent of the interest rate). (d) The required reserve ratio is a relatively ineffective tool for controlling the interest rate because it is generally not a binding constraint on the banks. (e) A lower bound for the Federal funds rate is provided by the discount rate. 3. The central banks of many countries have abolished reserve requirements for their domestic banks. This has necessitated (a) the introduction of enhanced deposit insurance schemes for the financial corporations in these countries. (b) that the central banks offer banks the opportunity to earn a specified interest rate on excess reserves when demand for reserves drops too low. (c) that central banks fix interest rates much more directly, through the Lombard rate (which is functionally identical to the discount rate offered by the Fed). (d) no change in the method the central banks use to manipulate short term interest rates. (e) Large scale consolidation of financial interests in these countries to provide credibility for the continued solvency of the banks.
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3 of 10 4. If the Fed raises the discount rate, then we expect to see (a) no effect on the federal funds rate if the Fed is initially issuing discount loans in the form of primary credit; (b) a decrease in the federal funds rate if the Fed is initially issuing discount loans in the form of primary credit; (c) an increase in the federal funds rate if the Fed is initially issuing no discount loans; (d) a decrease in the federal funds rate if the Fed is initially issuing no discount loans; (e) no change in the federal funds rate if the Fed is initially issuing no discount loans. 5.
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This note was uploaded on 04/03/2008 for the course ECON 327 taught by Professor Malone during the Winter '08 term at University of Michigan.

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310_PracticeExam2_Winter 2008 - 1 of 10 Economics 310 Money...

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