FInal exam Flashcards
Money demand is affected by:
A. Output and the nominal interest rate
B. The nominal interest rate and inflation
C. The nominal interest rate, output and inflation
D. The nominal interest rate, output and money supply
Output and the nominal interest rate only
Which of the following factors drives asset bubble formation that affects asset prices over the financial cycle?
A. Expectations
B. Wealth effects
C. Credit constraints
D. Inflation
Expectations
What does CDS stand for?
Credit Default Swap
Which of the following are part of the shadow banking system?
A. Investment banks and retail banks
B. Universal banks and pension funds
C. Mutual funds and insurance companies
D. Monetary and fiscal authorities
Mutual funds and insurance companies
Central banks and banks both create money means that: Both banks and the central bank ___
A. Can print cash
B. Contribute to the money supply
C. Are government institutions
D. Set their own interest rate
Contribute to the money supply
Another word for Bank Capital is: A. Bank Reserves
B. Bank Debt
C. Bank Equity
D. Bank Investments
Bank Equity
If a central bank follows a Taylor rule it sets:
A. The interest rate as a function of expected inflation and output.
B. The money supply as a function of expected inflation and output
C. The interest rate as a function of expected inflation and money demand
D. The money supply as a function of expected inflation and money demand
The interest rate as a function of expected inflation and output
Reinhart and Rogoff define financial crises along three characteristics, which is not one of them?
A. Household recovery through repairing balance sheets
B. Deep and prolonged asset price collapses
C. Large and lasting adverse impacts on output and employment
D. Exploding government debt due to lower taxes and bank bailouts
Household recovery through repairing balance sheets
2.2. SOS! Exam 2024: Why did central bankers start using the interest rate rather than the money supply to target inflation from approximately the 1980s on? Use the quantity theory of money in your answer (max 50 words).
Because velocity was less stable after 1980s.
Under the quant. theory of money, to buy all the goods available in economy, there should be enough money and velocity (MV=PY)
The instability of velocity implied that changes in money supply would not directly cause changes in price level
- M: money supply
- V: velocity of circulation of money
- P: Price level
- Y: output
2.2.b. SOS Why is a financial crisis much worse for a central bank in the 3-equation model with a financial sector compared to the 3-equation model without a financial sector? Explain (max 100 words).
Because the financial sector amplifies shocks in the economy via the financial accelerator and asset bubbles.
When an Asset Bubble bursts the Fin. Accelerator amplifies and propagates the shock.
SOS: According to the 3-equation model, why was monetary policy ineffective in preventing the financial crisis? Use the concepts ‘financial cycle’ and ‘business cycle’ in your answer (max 50 words).
Banks play a key role in the financial cycle through their lending and borrowing behaviour.
The housing sector is following the business cycle (procyclical) and house purchase is often financed by borrowing from banks.
Peak of financial cycle often followed by
banking crisis.
3.a. Why might a balance sheet recession take longer to bounce back from than a normal recession? Explain (max 50 words).
A balance sheet recession is a recession that follows the break of large asset price bubbles.
It’s different from a normal recession because of the collapse in asset prices on the balance sheets of households and firms.
This brings in the financial accelerator.
-> households and firms deleverage -> reduce debt to repaid balance sheet -> increase in
savings -> decreased AD -> this slows down recovery
SOS: Imagine a city with restricted space for new housing. Are the following statements in questions (b) and (c) true, false or uncertain? Explain.
b. (1 point) A spike in demand for housing will see house prices rise in the short-run
c. (1 point) An extended period of high demand for housing will lead to a house price bubble.
b. (TRUE) Because the supply curve is inelastic since there is no space for more houses then the prices will continue to rise not only short term but also long term and they will not fall.
c. (False) Since there is no supply response, prices do not fall in the long-run. Hence prices persist to rise, without there being a bubble.
Name one advantage and one disadvantage of a target inflation rate of 4% as compared with one of 0% per annum and explain (max 50 words).
Advantages: Avoid the deflation trap, defense against nominal rigidities such as in wages. Disadvantages: Menu costs, shoe-leather costs, inefficient allocation of resources because price changes are harder to account for.
What does the no-bail-out clause of the ECB mean? Explain why this clause would make the SGP less necessary (max 50 words).
The no-bail out clause means that the ECB can’t bail out governments of member states.
If credible, a no-bail-out clause would mean higher government deficits would be penalized by capital markets demanding a higher risk premium.
This makes limiting the deficit through the SGP less necessary.
