Final

Question 1

functions of money

Answer 1

medium of exchange
- used to pay for goods and services

unit of account
- measures value for goods and services in terms of money

store of value
- repository of purchasing power that lasts over time

Question 2

reserves

Answer 2

deposits of money held at the Fed and vault cash

Question 3

required reserves vs. maintained reserves

Answer 3

required reserves
- CB requires depository institutions to hold reserves

maintained reserves
- reserves actually held by depository institutions

Question 4

groups determining money supply that contribute to large excess reserve amounts during/after the great recession

Answer 4

central bank
- injects deposits into commercial banking sector to stimulate lending

commercial banks
- choose to keep deposits they obtain from CB in reserve accounts

non-bank public
- not looking for loans since they do not perceive investment opportunities in the economic climate
- not seen as creditworthy by the commercial banking sector

Question 5

direct vs. indirect finance

Answer 5

directly to financial markets or indirectly through financial intermediaries

Question 6

quantity theory of money

Answer 6

M x V = P x Y

Question 7

reserve requirement ratio in the US

Answer 7

0

Question 8

how can a government prevent its exchange rate from falling further?

Answer 8

raising interest rates domestically
- increases returns on government bonds so higher international demand
- foreign investors will need to sell their domestic currency and buy the other currency
- bids up the price

spending foreign reserves and buying their own currency in the foreign exchange market

Question 9

what happens to nominal and basket-implied cross rates if PPP holds?

Answer 9

they are the same

Question 10

the policy trilemma

Answer 10

free capital mobility, fixed exchange rate and independent monetary policy

Question 11

sahm’s rule

Answer 11

recession if the difference between the 3-month moving average of U3 and the lowest value of US over the last 12 months is greater than 0.5%

Question 12

policy based on sahm’s rule vs. policy based on output gap

Answer 12

sahm’s rule based on monthly unemployment data
- timely estimate of the beginning of a recession (1-month lag)

output gap based on quarterly GDP data that itself has lags from restatement
- output gap indications of a recession have a multi-quarter lag