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Money And Banking Practice Exam Essay

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Economics 310 Money and Banking Practice Midterm Exam Winter 2008

The actual midterm will involve only 25 multiple choice questions, to be completed in 80 minutes. No calculators, no cell phones, no personal digital media players or any other electronic equipment should be visible or in use during the exam. Each question will score 4 points if correct, 1 point if unanswered and 0 points if incorrect. This means that your final exam score will lie between 0 and 100, but that you can score 25 points simply by turning in a blank exam. It also means that a complete guess will score 4 points with probability ¼ and 0 points with probability ¾. On average, such a guess will score 1 ...view middle of the document...

A lower current inflation rate.

4. Suppose inflationary expectations fall. By considering the bond market, which of the following predictions would you make? (a) (b) (c) (d) Bond prices fall and there is an ambiguous effect on quantity of bonds traded. Interest rates fall and the quantity of bonds traded falls. Bond prices rise and the quantity of bonds traded rises. Interest rates fall and there is an ambiguous effect on quantity of bonds traded.

3 of 9 5. Consider the following statements concerning the money base. (i) (ii) (iii) (iv) Base money is equal to the currency in circulation plus bank reserves Base money represents the liabilities of the central bank Base money is that portion of the money supply that is directly controllable by the central bank The Fed focuses on controlling the interest rate because changing Base Money through open market operations has very little impact on M1.

Which of the above statements are true? (a) (b) (c) (d) (i) and (ii) (i) (ii) and (iii) (i), (iii) and (iv) (i), (ii), (iii) and (iv)

6. In the simple deposit multiplier model (a) (b) (c) (d) banks hold an arbitrary amount of money as excess reserves any funds borrowed by the general public are held as currency any funds borrowed by the public are held as checking deposits the required reserve ratio is equal to 10%.

7. Consider the following two bonds at the time they are issued: I : a five year coupon bond with face value $1000 and coupon rate 5% II: a one year discount bond with face value $1000. Which of the following statements is true? (a) If the price of bond I is $1010, then the yield to maturity on bond I is greater than 5% (b) If the price of bond II is $800, then the yield to maturity is 20%. (c) The higher the yield to maturity offered on bond II, the higher its current price will be. (d) If the price of bond I is $975 and the price of bond II is $900, then the yield to maturity on both bonds is greater than 5%.

4 of 9 8. In the money multiplier model . (a) if everything else is held constant, the money supply will be larger if the banks hold a larger proportion of deposits as excess reserves. (b) if everything else is held constant, the money supply will be larger when the public holds a smaller proportion of borrowed funds as currency. (c) any funds borrowed by the general public must be held in checking deposits. (d) the amount of reserves banks hold in excess of their requirements depends only on the interest rate. 9. On April 1 2005, the Department of the Treasury issued a 5 year Treasury Inflation Protected Security and a 5 year Treasury note. Both had face values of $1000. The 5 year TIPS offered a coupon rate of 2.5% and the Treasury note offered a coupon rate of 5%. When the bonds were released, the price of the 5 year TIP security was $1000 and the price of the 5 year Treasury note immediately jumped down to $950. From this we can conclude: (a) that inflation was expected to run above 2.5% on average over the next...

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