Name _____________________________ _ PSU ID (last 4)__________ Section ______
Quiz #1 - Econ 351 Spring 2008- Chuderewicz
DO NOT TURN THIS QUIZ SHEET OVER UNTIL INSTRUCTED TO DO SO: ALSO, PLEASE DO ALL
WORK ON QUIZ SHEET AND FILL OUT THE ANSWERS ON YOUR SCANTRON WHEN YOU ARE
DONE TAKING THE QUIZ, THANKS AND GOOD LUCK!
Quiz #1 – answer A for true and B for false
Form A
1. A flight to the “safe haven” of US Treasuries results in lower interest rates in the Treasury market and thus if you saw it
coming, you should have been bullish since a safe haven argument is consistent with the Treasury market rallying.
2. When the Fed purchases Government securities they are injecting excess reserves into the banking system. Purchasing
Government securities is consistent with the FOMC’s recent 50 basis point cut in target for the federal funds rate.
3. If inflationary expectations suddenly rise then according to the Fisher effect, the bond market should rally (bond prices rise)
since according to the Fisher effect, higher inflationary expectations should result in higher nominal interest rates, consistent with
a bond market rally.
4. The real rate of interest is calculated by taking the summation of expected inflation and nominal interest rates.
5. According to the Fisher effect, bonds prices and expected inflation are positively related.
6. If expected inflation is 3% and the federal funds rate is 4.5%, then the real federal funds rate is
( –1.5%).
7. If the Fed raised the reserve requirement ratio, then the money supply will fall, all else constant, since the money multiplier is
negatively related to the reserve requirement ratio.
8. During the great depression the money supply actually fell and if the Fed had to do it all over again, they probably would have
injected more liquidity by conducting open market purchases. In fact, we argued that the Fed learned from their mistake and
during Y2K, they made sure there was plenty of liquidity available to the financial system.
9. A portfolio shock, say due to Y2K, resulted in the public holding more money at any given interest rate. This would shift
money demand to the right and if the Fed wanted to keep interest rates from rising, they could accommodate the shock by
conducting open market sales.
10. The currency to deposit ratio and the money multiplier are negatively related and thus, during Y2K we would expect the
money multiplier to fall since households, in the aggregate, were holding more currency relative to deposits since they were
worried about Y2K and its impact on their deposits. In order to offset this impact on the money multiplier, the Fed would (could)
conduct open market purchases.
Original conditions: Reserve Demand: Rd = 700 – 50 iff Deposits: D = 4000b, required reserve ratio (RR/D) = 0.10, Excess
Reserves = 0.00 (zero) and the currency in circulation C = 800b.
11. Given the original conditions, the market clearing federal funds rate is 6 percent.
12. Given the original conditions, if the Fed wanted to lower the federal funds rate by one percentage point, they would need to
conduct $20 billion in open market purchases.
13. Given the original conditions, the money multiplier is 5.
14. If I short 100 shares of Apple stock when the price is $32 and the price rises to $32.50 then I am losing money since when
shorting a stock, I hope the price falls. In this case, if I close my position (cover my short) when the price is $32.50, then I would
lose $50 (ignoring any other transactions costs/fees).
15. The discount rate is currently set 50 basis points above the target for the federal funds rate.
16. The most recent recession ended in 2003.
17. When the Fed conducts open market purchases they are injecting excess reserves into the banking system and thus, the
institution (dealer) that sold the bonds to the Fed is able to lend out all the reserves they receive from the Fed.
18. We argued the implementation lag is longer for Fiscal authorities than it is for monetary authorities.
19. The misery index is the summation of the rate of inflation and the rate of unemployment.
20. NAIRU is defined as the highest the unemployment rate can go without inflation accelerating.
Name _____________________________ _ PSU ID (last 4)__________ Section ______
Quiz #1 - Econ 351 Spring 2008- Chuderewicz
DO NOT TURN THIS QUIZ SHEET OVER UNTIL INSTRUCTED TO DO SO: ALSO, PLEASE DO ALL
WORK ON QUIZ SHEET AND FILL OUT THE ANSWERS ON YOUR SCANTRON WHEN YOU ARE
DONE TAKING THE QUIZ, THANKS AND GOOD LUCK!
Quiz #1 – answer A for true and B for false
Form B
1. If the Fed raised the reserve requirement ratio, then the money supply will fall, all else constant, since the money multiplier is
negatively related to the reserve requirement ratio.
2. The currency to deposit ratio and the money multiplier are negatively related and thus, during Y2K we would expect the
money multiplier to fall since households, in the aggregate, were holding more currency relative to deposits since they were
worried about Y2K and its impact on their deposits. In order to offset this impact on the money multiplier, the Fed would (could)
conduct open market purchases.
3. The real rate of interest is calculated by taking the summation of expected inflation and nominal interest rates.
4. A portfolio shock, say due to Y2K, resulted in the public holding more money at any given interest rate. This would shift
money demand to the right and if the Fed wanted to keep interest rates from rising, they could accommodate the shock by
conducting open market sales.
5. According to the Fisher effect, bonds prices and expected inflation are positively related.
6. The misery index is the summation of the rate of inflation and the rate of unemployment.
7. NAIRU is defined as the highest the unemployment rate can go without inflation accelerating.
8. If expected inflation is 3% and the federal funds rate is 4.5%, then the real federal funds rate is
( –1.5%).
9. The discount rate is currently set 50 basis points above the target for the federal funds rate.
10. During the great depression the money supply actually fell and if the Fed had to do it all over again, they probably would
have injected more liquidity by conducting open market purchases. In fact, we argued that the Fed learned from their mistake and
during Y2K, they made sure there was plenty of liquidity available to the financial system.
11. A flight to the “safe haven” of US Treasuries results in lower interest rates in the Treasury market and thus if you saw it
coming, you should have been bullish since a safe haven argument is consistent with the Treasury market rallying.
12. If inflationary expectations suddenly rise then according to the Fisher effect, the bond market should rally (bond prices rise)
since according to the Fisher effect, higher inflationary expectations should result in higher nominal interest rates, consistent with
a bond market rally.
Original conditions: Reserve Demand: Rd = 700 – 50 iff Deposits: D = 4000b, required reserve ratio (RR/D) = 0.10, Excess
Reserves = 0.00 (zero) and the currency in circulation C = 800b.
13. Given the original conditions, if the Fed wanted to lower the federal funds rate by one percentage point, they would need to
conduct $20 billion in open market purchases.
14. Given the original conditions, the market clearing federal funds rate is 6 percent.
15. Given the original conditions, the money multiplier is 5.
16. If I short 100 shares of Apple stock when the price is $32 and the price rises to $32.50 then I am losing money since when
shorting a stock, I hope the price falls. In this case, if I close my position (cover my short) when the price is $32.50, then I would
lose $50 (ignoring any other transactions costs/fees).
17. When the Fed purchases Government securities they are injecting excess reserves into the banking system. Purchasing
Government securities is consistent with the FOMC’s recent 50 basis point cut in target for the federal funds rate.
18. When the Fed conducts open market purchases they are injecting excess reserves into the banking system and thus, the
institution (dealer) that sold the bonds to the Fed is able to lend out all the reserves they receive from the Fed.
19. We argued the implementation lag is longer for Fiscal authorities than it is for monetary authorities.
20. The most recent recession ended in 2003.
Name _____________________________ _ PSU ID (last 4)__________ Section ______
Quiz #1 - Econ 351 Spring 2008- Chuderewicz
DO NOT TURN THIS QUIZ SHEET OVER UNTIL INSTRUCTED TO DO SO: ALSO, PLEASE DO ALL
WORK ON QUIZ SHEET AND FILL OUT THE ANSWERS ON YOUR SCANTRON WHEN YOU ARE
DONE TAKING THE QUIZ, THANKS AND GOOD LUCK!
Quiz #1 – answer A for true and B for false
Form C
1. According to the Fisher effect, bonds prices and expected inflation are positively related.
2. If inflationary expectations suddenly rise then according to the Fisher effect, the bond market should rally (bond prices rise)
since according to the Fisher effect, higher inflationary expectations should result in higher nominal interest rates, consistent with
a bond market rally.
Original conditions: Reserve Demand: Rd = 700 – 50 iff Deposits: D = 4000b, required reserve ratio (RR/D) = 0.10, Excess
Reserves = 0.00 (zero) and the currency in circulation C = 800b.
3. Given the original conditions, the market clearing federal funds rate is 6 percent.
4. Given the original conditions, if the Fed wanted to lower the federal funds rate by one percentage point, they would need to
conduct $20 billion in open market purchases.
5. Given the original conditions, the money multiplier is 5.
6. When the Fed conducts open market purchases they are injecting excess reserves into the banking system and thus, the
institution (dealer) that sold the bonds to the Fed is able to lend out all the reserves they receive from the Fed.
7. The real rate of interest is calculated by taking the summation of expected inflation and nominal interest rates.
8. A flight to the “safe haven” of US Treasuries results in lower interest rates in the Treasury market and thus if you saw it
coming, you should have been bullish since a safe haven argument is consistent with the Treasury market rallying.
9. If expected inflation is 3% and the federal funds rate is 4.5%, then the real federal funds rate is
( –1.5%).
10. The most recent recession ended in 2003.
11. During the great depression the money supply actually fell and if the Fed had to do it all over again, they probably would
have injected more liquidity by conducting open market purchases. In fact, we argued that the Fed learned from their mistake and
during Y2K, they made sure there was plenty of liquidity available to the financial system.
12. The misery index is the summation of the rate of inflation and the rate of unemployment.
13. A portfolio shock, say due to Y2K, resulted in the public holding more money at any given interest rate. This would shift
money demand to the right and if the Fed wanted to keep interest rates from rising, they could accommodate the shock by
conducting open market sales.
14. When the Fed purchases Government securities they are injecting excess reserves into the banking system. Purchasing
Government securities is consistent with the FOMC’s recent 50 basis point cut in target for the federal funds rate.
15. NAIRU is defined as the highest the unemployment rate can go without inflation accelerating.
16. The currency to deposit ratio and the money multiplier are negatively related and thus, during Y2K we would expect the
money multiplier to fall since households, in the aggregate, were holding more currency relative to deposits since they were
worried about Y2K and its impact on their deposits. In order to offset this impact on the money multiplier, the Fed would (could)
conduct open market purchases.
17. If I short 100 shares of Apple stock when the price is $32 and the price rises to $32.50 then I am losing money since when
shorting a stock, I hope the price falls. In this case, if I close my position (cover my short) when the price is $32.50, then I would
lose $50 (ignoring any other transactions costs/fees).
18. If the Fed raised the reserve requirement ratio, then the money supply will fall, all else constant, since the money multiplier
is negatively related to the reserve requirement ratio.
19. The discount rate is currently set 50 basis points above the target for the federal funds rate.
20. We argued the implementation lag is longer for Fiscal authorities than it is for monetary authorities.
Keys
Form A
1) A ,A ,B, B, B
6) B,A,A,B,A
11)A,B,B,A,A
16)B,A,A,A,B
Form B
1) A,A,B,B,B
6)A,B,B,A,A
11)A,B,B,A,B
16)A,A,A,A,B
Form C
1) B, B, A, B, B
6) A, B, A, B, B
11) A, A, B, A, B
16) A, A, A, A, A