Questions posted below

Question 1. “Inflationary policies can spur growth for a time, which is why politicians have often found them so tempting. This is the best argument for making central banks ……” Complete this clipping. a) independent b) subject to regulations c) under the control of elected officials d) responsible for economic growth Briefly explain your reasoning here:

Question 2. Suppose banks face a 6% required reserve ratio and the Fed operates a discount window policy which allows its member banks to meet 20% of its reserves by borrowing from the Fed. If banks prefer to be loaned up (hold 0 excess reserves) one can expect a $3B open market purchase to __________ the money supply by _____________, assuming no leakages. Show your work here.

Question 3. A bond due to mature and pay $1000 in one year’s time has a coupon of $120 and a current price of $1025. The interest rate is about Show your work here:

Question 4. Suppose the current interest rate is 5%. What price should one expect to pay for a $1000 zero coupon treasury bill, due to mature in one year, which had originally been sold when the interest rate was 10%? Show your work here:

Question 5. Consider a bond with a coupon of $100, and a face value of $1,000, due to mature in one year’s time. The current interest rate is 10%. The current price of this bond is Show your work here:

Question 6. “The bond markets were stunned by the shock of Thursday’s flash second-quarter news that the economy has grown three whole percentage points. Add that discomforting prospect to the other horrifying disclosure – that, at last reading, our money supply had climbed by a staggering $4.8 billion – and you’ll know why people were heading for the bond market exits.” People are heading for the bond market exits because they suspect that a) inflation will fall b) interest rates will increase c) interest rates will decrease d) something illegal is happening Briefly explain your reasoning here:

Question 7. “It had been feared that more good economic readings would trigger a sell-off in the bond market, which typically responds negatively to such news because……” Complete this clipping. a) inflation expectations may rise, raising the interest rate b) the Fed may react by raising the interest rate c) usually such news foretells a fall in interest rates d) both a) and b) above Briefly explain your reasoning here:

Question 8. “Analysts say the three-month rally in bonds has been fueled by Washington’s promise to balance its budget and OPEC’s decision to abandon support for higher world oil prices in the short run.” The bond rally is because a) unemployment should fall b) inflation fears have increased c) interest rates are expected to fall d) everyone is optimistic about future economic prosperity Briefly explain your reasoning here:

Question 9. “Earlier in the week the central bank’s traders intervened aggressively in the money market to push the yield on last week’s Treasury bills sharply higher.” What kind of intervention is being referred to? The central bank a) sold bills b) bought bills c) announced an easier monetary policy d) raised the legal reserve requirement Briefly explain your reasoning here:

Question 10. “News of economic weakness last week cleared the way for higher bond prices. The New York bond market moved quickly to capitalize on this good bad news: prices shot up more than a point in minutes.” Bond prices rose because a) inflation expectations fell b) higher prosperity is coming c) unemployment is expected to fall d) the Fed is expected to raise interest rates Briefly explain your reasoning here:

Question 11. “The Fed is scrambling hard to keep interest rates from increasing in the face of renewed inflationary pressures, but the banking industry is a lot less interested in cooperating with the Fed because of the rising loan demand they are facing.” Loan demand is rising because a) real interest rates are low b) real interest rates are high c) people have confidence in the Fed d) inflation expectations are falling Briefly explain your reasoning here:

Question 12. “Bond traders, worried about inflation, have bid long rates up to 8 percent, raising real interest rates to 5 percent.” Current inflation is approximately Briefly explain your reasoning here:

Question 13. “The Fed is frequently pressed by people to do things that would involve giving up control over money creation without any apparent recognition on their part that that is what they are asking. We, of course, have to refuse.” Which of the following is not an example of such a request? a) adopt the monetarist rule b) produce an unemployment rate lower than the NRU. c) finance government deficits to avoid the higher interest rates they produce. d) effect an immediate lowering of the interest rate in an inflationary environment Briefly explain your reasoning here:

Question 14. “Another criticism of deficit budgets is that they hamper the private sector’s ability to raise capital.” This hampering is caused by a) high taxes b) high bond prices c) high interest rates d) central bank bond purchases Briefly explain your reasoning here:

Question 15. Suppose currently an economy is receiving $3b fewer tax revenues and making $5b more in unemployment insurance payments than what would be the case at its long-run average rate of unemployment. There is a budget deficit of $60b, a publicly-held national debt of $200b, a money supply of $600b, a long-run growth rate in nominal GDP of 8%, and an annual seigniorage of $2b. Its structural deficit is Show your work here: 


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