Economics 3215 (Money, Banking and Financial Markets) Midterm Format

Economics 3215 (Money, Banking and Financial Markets) Midterm Format

Date: Tuesday, February14, 2017Value: 25% of mark

Coverage:Monetary economics (start of course to Feb. 9th lecture(overhead sets 1-3; assignments 1,2)

Format: Part 1: Definitions (some choice, roughly 10 pts., 4 definitions)

Part 2: Shorter questions (some choice, 20 pts., 5 each)

Part 3: Multipart questions (20 pts, 2 questions)

Example questions (also review the questions on Assignments 1 and 2):

1. (a) What are the three roles that money plays in an economy? Explain their importance.

(b) What assets make up the Canadian money supply? What does most of the money supply consist of?

2. The quantity equation says: MV=PY. Define each of the terms. What two major assumptions are made to turn the equation into a theory? Explain the thinking behind each assumption.

3. Outline Krugman’s “Babysitter coop” article. What does it suggest about monetary economies?

4. (a) What are bank reserves? In Canada what assets are used as bank reserves?

(b) Explain why banks hold reserves.

increase reserve assets in the banking system by $100,000.

(d) (i) Describe the deposit expansion process which will be set of by the injection of $100,000 of

reserves (do this for the simplest case where there is only one type of deposit and the

public does not hold currency, assume a target reserve ratio of 0.05).

(ii) By how much will deposits increase as a result the deposit expansions process?

(e) Will the ultimate increase in the quantity of deposits be larger or smaller if the members of the

public desire to hold $1 of currency for every $2 dollars of deposits they have. Explain.

5. (a) Say that the Bank of Canada wants to reduce its target for the overnight rate from 3% to 2%.

(i) Would the policy require the Bank of Canada to increase or decrease the quantity of

reserves? Describe two ways in which the change in reserves could be achieved.

(ii) Use the model of the overnight market to illustrate the effect of the policy.

(b) Thoroughly explain how and why the change in the overnight rate in (a) will affect other

interest rates (e.g. deposit rates, loan rates, yields in securities markets etc.)

exchange rate affect aggregate demand?

6. (a) What is the current policy goal of the Bank of Canada?

(b) Why might this be a reasonable focus?

suggest that the Bank of Canada buy or sell treasury bills? Explain.

7. (a) Both the US Federal Reserve Bank and the Bank of Canada effectively place a ceiling on the level of the overnight rate (the Federal Funds rate in the US). How is this done? Show the effect on the supply curve for reserves. (b) What are the ceiling rates in Canada and the US called?

8. (a) What is a deposit multiplier? On what variables does it depend?

(b) Explain the effect of the following on the size of the deposit multiplier:

(i) the Bank of Canada raises the rate it charges to banks who borrow from it to cover shortfalls.

(ii) Increasing use of bank cards decreases the amount of currency households wish to hold.

(iii) households increasingly hold their funds in low turnover types of deposits.

9. What is the overnight rate? Explain how a fall in reserves affects this rate (provide a diagram).

10. (a) Draw an MP curve (be sure to label the axes). What behavior is the MP curve intended to capture?

(b) If the central bank decided to lower its inflation target what would happen to the MP curve.

Explain why.

11. (a) Draw an IS curve (be sure to label the axes). Explain the behavior that lies behind the IS curve (show how it is derived).

(b) Use the IS curve and MP curve to derive an aggregate demand (AD) curve that shows the relationship between inflation and Real GDP.

12. Write the equation for the aggregate supply curve for the model discussed in the textbook and course notes. Explain the behavior underlying the aggregate supply curve.