Week 5

Question 1

What is Narrow money M0?

Answer 1

This is CB money: notes, coins and reserves of banks held at the CB. It is the most liquid form of money.

Question 2

What is Broad money M2?

Answer 2

This is CB money and also commercial bank money.

Question 3

The choice of how much money households and firms want to hold depends on…

Answer 3

…on their level of income and the interest rate:

1. As their income increases, households will want to carry out more transactions, so will hold more money (deposits).
2. A higher interest rate will make buying bonds more attractive and will reduce the proportion of income households and firms wish to hold in deposits.

Question 4

A liquidity crisis:

Answers:
1. can easily become a solvency crisis
2. occurs when banks do not have strong fundamentals
3. occurs when everyone wants to hold risky assets
4. all of the above

Answer 4

can easily become a solvency crisis

Question 5

An investment boom:

Answers:
1. shifts the IS to the left
2. shifts the PC to the right
3. does not affect any of the curves in our model
4. is totally irrational

Answer 5

none of the above

Question 6

The statement from the book that central banks and banks create money means:

Answers:
1. that both banks and CB can print cash
2. that both contribute to the size of money supply in circulation
3. that both are government institutions
4. none of the above

Answer 6

that both contribute to the size of money supply in circulation

Question 7

Which one of the below policies is an “unorthodox policy”?

Answers:
1. changing policy rate
2. changing the reserve requirement
3. open market operation
4. quantitative easing

Answer 7

quantitative easing

Question 8

Money demand refers to the money of:

Answers:
1. households
2. firms
3. both households and firms
4. none, just investors

Answer 8

both households and firms

Question 9

Claim: A bond is a claim on future cash flows

Answer 9

TRUE

Question 10

Asymmetries of information:

Answers:
1. are easy to solve and hence to do not contribute to the financial system as we model it
2. are a main reason why the financial system is formulated as it is
3. they do not exist in the real world, except very rarely
4. none of the above

Answer 10

are a main reason why the financial system is formualted as it is

Question 11

The lender of last resort

Answers:
1. is the prime minister
2. is biggest bank in the nation
3. is a fund made of banks
4. none of the above

Answer 11

none of the above

Question 12

Money demand is affected by the interest rate

Answers:
1. positively
2. negatively
3. it is not affected by interest rate

Answer 12

negatively

Question 13

When market interest rate raises, the price of exisiting bonds:

Answers:
1. drops
2. raises
3. is not affected, the bonds are already issued

Answer 13

drops

Question 14

What is the banking mark - up?

Answer 14

The gap between the desired lending rate rs set by the banks and the policy rate rp set by the CB.

Question 15

The demand for money depends … on output and … on the nominal interest rate

Answer 15

positively

negatively

Question 16

How is lending rate mark up related to:
-riskiness of the loan?
-risk tolerance?
-bank equity?

Answer 16

Positively
Negatively
Negatively

Question 17

Claim: Money supply is created only by Central Bank not commercial banks

Answer 17

False:

Money supply is created by both Central Bank and commercial banks

Question 18

Money demand is a function of …

Answer 18

…output and the interest rate

Question 19

Money demand … with output and … with interest rate

Answer 19

Increases with output
Decreases with interest rate

Question 20

Structural factors that swift the MD/P (money demand) curve are…

Answer 20

-Confidence
-Innovations in payment tech
-Introduction on financial instruments

Question 21

Money demand will … with loss of confidence.

Answer 21

increase

Question 22

Mark up will … with a merger of 2 banks.

Answer 22

increase.

Less completion ->monopoly -> increase markup

Question 23

Claim: Shifts in money demand simply shift money supply and they have no influence on the real economy, so no need to focus on them

Answer 23

True

Question 24

If loans are viewed as less risky this will … the mark up. That means we move … the IS curve.

Answer 24

decrease

down

Question 25

If the bank equity falls this will …. the ability to bear risk. Hence the markup will … and we move … the is curve.

Answer 25

decrease

increase

up

Question 26

If markup increases, y output …

Answer 26

drops

Question 27

In a financial crisis the relationship between … breaks down.

What does that mean?

Answer 27

between money market rate (𝑟𝑃) and lending rate (𝑟)

This means that key transmission mechanism of MP broke down.

Question 28

QE shows commitment to …, helping to anchor … and help prevent …

Answer 28

inflation target πT

inflation expectations πE

a deflation trap

Question 29

What are the possible dangers of QE?

Answer 29

1. CB independence & credibility ↓: Future inflation-targeting becomes harder.
2. Inflation expectations ↑ : QE might lead to higher future inflation, but higher 𝜋𝐸 was
   necessary to prevent a deflation trap.
3. Financial cycle: Promotes asset bubbles.
4. Excess reserves by banks can ↑ loans → inflationary risk.
5. QE Exit: In theory, opposite effect to QE, i.e. downward pressure on π , raise long term yields.

Question 30

If the degree of competition among the banking sector … the mark-up …

Answer 30

decreases,
increases

Question 31

Mark-up (μB ) … with risk and
… with risk tolerance and bank equity.

Answer 31

increases.

decreases.

Question 32

If the banks equity … the mark-up …

Answer 32

decreases.

increase