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Name _____________________
Student ID _____________________
Midterm Exam
Economics 4334
Money and Banking
Thursday, October 21st, 2014
Please write all of your answers on this exam paper.
Multiple Choice (1 point each)
1.
Which of the following is not a characteristic of full fledged inflation targeting
a.
An explicit central bank mandate to pursue price stability as the primary
objective of monetary policy,
b.
Monetary policy has an explicit quantitative targets for inflation set
independently by the central bank;
c.
Policy actions based on a forward-looking assessment of inflation pressures,
taking into account a wide array of information;
d.
Increased transparency of monetary policy strategy and implementation.
___________
2.
The People’s Bank of China increases its required reserve ratio. This increases
the demand for reserves by banks and also increases the reserve to deposit ratio. If the
People’s Bank has a policy of targeting the inter-bank interest rate, this results in:
a.
b.
c.
d.
an increase in the monetary base and an increase in the money multiplier
an increase in the monetary base and a decrease in the money multiplier
a decrease in the monetary base and an increase in the money multiplier
a decrease in the monetary base and a decrease in the money multiplier.
___________
3.
The Taylor Principle is such that when the central bank faces a 1% rise in the
rate of expected inflation, they should
a.
b.
c.
d.
raise the nominal interest rate by more than 1%.
cut the nominal interest rate by more than 1%.
raise the real interest rate by more than 1%.
cut the real interest rate by more than 1%.
_________
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4.
a.
b.
c.
d.
When we see a dynamic open market sale by a central bank with a credible
inflation target using the interest rate as a policy instrument we should see:
The yield curve getting steeper and the monetary base getting larger.
The yield curve getting steeper and the monetary base getting smaller.
The yield curve getting flatter and the monetary base getting larger.
The yield curve getting flatter and the monetary base getting smaller.
_________
5.
a.
b.
c.
d.
The Bank of Korea wants to slow the appreciation of its currency and
conducts a sterilized intervention. We should see:
The central bank issue monetary stabilization bonds.
The central bank purchase monetary stabilization bonds.
The monetary base increase.
The monetary base decrease.
_________
6.
Most developed country inflation-targeting central banks currently target:
a.
Core consumer price inflation of more than 4 % annually over a medium
term horizon.
b.
Core consumer price inflation of less than 4 % annually over a medium term
horizon.
c.
Headline consumer price inflation of more than 4 % annually over a medium
term horizon.
d.
Headline consumer price inflation of less than 4 % annually over a medium
term horizon.
___________
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7.
For an inflation targeting central bank, bond traders will need to do
increasing:
a.
repurchase agreements (repos) if they are defending a policy target in the face
of increasing reserve demand; and repurchase agreements (reverse repos) if they are
raising the policy interest rate.
b.
repurchase agreements (repos) if they are defending a policy target in the face
of increasing reserve demand; and reverse repurchase agreements (reverse repos) if
they are raising the policy interest rate.
c.
reverse repurchase agreements (repos) if they are defending a policy target in
the face of increasing reserve demand; and repurchase agreements (reverse repos) if
they are raising the policy interest rate.
d.
reverse repurchase agreements (repos) if they are defending a policy target in
the face of increasing reserve demand; and reverse repurchase agreements (reverse
repos) if they are raising the policy interest rate.
_________
Short Answer Questions
1.
(2 points) During the 16th century, the Ming dynasty abandoned the use of
fiat currency. Name two reasons.
a.
b.
2.
(2 points) Name the policy interest rate of :
a.
Japan
b.
Korea
c.
The Eurozone
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3.
(2 points) Identify the strategies of the European Central Bank for
achieving independence along with transparency and accountability.
a.
Independence
b.
Transparency & Accountability
4.
(2 points) Explain two reasons why most developed economies and
emerging markets have abandoned monetary targets.
a.
b.
5.
(1 point) Name a central bank that has used forward guidance
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6.
(2 points) Explain two reasons why monetary policy needs to be forward
looking.
a.
b.
Numerical Questions
7.
(1 point) Indonesia’s one year interest rate in May 2014 was 9% (i = .09).
The US interest rate was zero (iF = 0). The Indonesian Rupiah-US Dollar exchange
rate was Et = 11500. Calculate the one year forward rate, Ftt+1 .
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8.
(1 point) The reserve to deposit ratio is 10% and the ratio of cash holdings
to deposits is .9. Calculate the money multiplier.
9.
(2 points) In March 2010, the interest rate on a 1 year government note in
India was about 5%. The annual interest rate on a 2 year note was 6%. The annual
interest rate on a 3 year note was 6.5%. Calculate the March 2010 market expectation
of the path of the one year interest rate for 2011 and 2012.
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Graphing Questions
10.
(2 points) Banks sharply reduce their demand for reserves in an economy in
which the central bank conducts defensive open market operations only infrequently.
Instead, the central bank will have standby lending and deposit facilities.
Demonstrate the way that the standby facility limits movements in the interbank rate.
iIBOR
Reserves
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11.
(4 points) Two recent monetary policies of the bank of Japan are
implementing Quantitative & Qualitative Easing and setting a higher inflation target.
a.
Explain the purpose of increasing the inflation target.
b.
Explain what the Bank of Japan means by Q&QE. Demonstrate the
effect on the BoJ’s balance sheets using the T-Account.
Assets
Liabilities
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Demonstrate using a graph, the effect of Q & QE on the interbank market on the
following graph. Clearly market the graph but no further explanation is necessary.
iIBOR
Reserves
Explain using the preferred habitat theory the logic behind Q&QE.
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12.
(2 points) Foreign Exchange Market. The Philippines announces the
implementation of a stock market reform, commencing next year, which will allow
foreigners greater access to the local stock market. Clearly mark the graph but no
further explanation is necessary.
a. Demonstrate the effect of such an announcement on the forex market if the central
bank does not intervene in the forex market.
E
Turnover
Demonstrate the effect on the interbank market if the central bank engages in
unsterilized intervention.
iIBOR
Reserves
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13. (12 points) The US central bank has the inter-bank interest rate as an operating
target with an inflation targeting interest rate rule. The U.S. government treasury
increases spending which increases economic activity but putting upward pressure
on inflation. Draw two graphs which show the impact of this fiscal spending on
GDP and inflation and another which shows the impact on the inter-bank market?
Remember to consider both the effects on demand for reserves as well as monetary
policy.
π
Y
Economy
iFF
Interbank Market
D
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