FINA 30203 Exam 3

If M2 Money growth increases by 10% over the past year, what do we expect the percentage change in the price level to be over the same period (using the regression output below)? Enter your answer as a percentage (i.e., 5.3% = 5.3, NOT .053). Round to 2 decimal places.

3.67

What is AIG and what role did AIG play in the crisis?

AIG was one of the beneficiaries of the 2008 bailout of institutions that were deemed "too big to fail." The insurance giant was among many that gambled on collateralized debt obligations and lost. AIG survived the financial crisis and repaid its massive debt to U.S. taxpayers

Suppose you run a regression of the annual change in GDP price level on the annual percent change in M2 money stock, and you obtain the following results (below). What is the beta coefficient?

Beta coefficient is not the intercept number

What is forward guidance?

Communication about the likely future course of monetary policy

In the equation: MV = PY, what is used for P?

GDP deflator level

Why did Velocity of M2 fall during the financial crisis?

Investors demand for holding money went way up

Which one of the following statements is most correct?

It is impossible to have high, sustained inflation without monetary accommodation

Equilibrium in the money market would be expressed by which one of the following?

Ms = Md

Why did conventional monetary policy not work during the financial crisis?

Nominal interest rates are effectively bound by zero and bank reserve requirements cannot be made so low that those banks risk default

The primary monetary policy tool most used by central banks today is

Open Market Operations

the theory that money growth translates directly into inflation is the

Quantity Theory of Money

What is a mortgage backed security? A collateralized debt obligation? A credit default swap? What role did they play in the crisis?

Securitization of mortgage debt in bond-like investments such as mortgage-backed securities and collateralized debt obligations was a big cause of the financial crisis. Securitization of home mortgages fueled excessive risk-taking throughout the financial sector, from mortgage originators to Wall Street banks

Which of the following topics were pivotal to the crisis, but not included in the timeline you were required to read? (SELECT ALL THAT APPLY)

The role of the savings and Loans Crisis; the global savings glut and flight to quality; when the reserve primary fund "broke the buck" which sent money markets into chaos

What role did the saving's and loans crisis play in the financial crisis of 2008?

The savings and loans crises played a huge role in the 2008 financial crises and was undoubtedly one of the most underlying reasons as to why the crises occurred. The savings and loans crises resulted in thousands of of savings and loan institutions closing and billions of dollars lost, hurting customers and taxpayers. This resulted in many subprime loans and mortgages being given out, but homeowners began to default on their loans due to higher rates. This led to an increase in vacant homes which then decreased the property values.

Can the Fed stabilize inflation with money growth if velocity not constant but is predictable?

Yes

Did the Fed Bail out AIG?

Yes

If velocity is constant, would a monetary policy that fixed the growth rate of money work to control inflation?

Yes

for which of the following would the fed raise interest rates without hesitation

a shift in aggregate demand above potential output

Modern monetary policymakers work to reduce the volatility created by fluctuations in __________ by adjusting __________.

aggregate demand and aggregate supply; target interest rate

The Taylor rule is

an approximation that seeks to explain how the FOMC sets their target

Why might controlling inflation in the short run differ than the long run?

because velocity is constant in the long run, but not in the short run.

Raising interest rates following the use of unconventional policy tools depends on

both the size and composition of the central bank's balance sheet

While GDP was once a key cyclical indicator, its usefulness has declined substantially for all of the following reasons except which one?

contains too much information

For which countries can changes in money velocity largely be ignored for controlling inflation via the money supply in the short run?

countries with high inflation

History shows that

countries with high rates of money growth have high rates of inflation

The key to the success of forward guidance as a monetary policy tool is

credibility

The economy is in both a short- and long-run equilibrium if

current inflation equals expected inflation and current output equals potential output

If the fed raises the IOER, this will cause banks to <blank1> the federal funds rate they are willing to pay other banks to borrow excess reserves.

increase

As a person's wealth increases, we would expect the demand for money to

increase but at a rate than dollar for dollar

Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)to determine the change in the target federal funds rate for every one percent increase in the rate of inflation. This will

increase the target federal funds rate by 1.5 percent and increase the real federal funds rate by 0.5 percent.

For central bankers to alter the real interest rate by changing the nominal interest rate,

inflation expectations should be quite stable

What is the intercept?

intercept number

A major contributing factor to the instability of money demand over the past 25 years is the

introduction of financial instruments that pay higher returns than money but can be used as a means of payment

If velocity were constant at 2 while M2 rose from $10 trillion to $11 trillion in a single year, what would happen to nominal GDP?

it would go up by 10%

If the level of current output suddenly falls below the potential level of output, central bankers would typically

lower the real interest rate

in studying the average annual inflation and money growth in 160 countries over the three decades that began in 1980, it is startling to see that researchers found many countries that had experienced rates of inflation that averages

more than 200% a year

What is the Greenspan Put?

policies implemented by former Fed Chair Alan Greenspan that halted excessive stock market declines

If the market federal funds rate were below the target rate, the response from the Fed would likely be to

raise the IOER rate

In the long run, with %ΔV = 0, we can conclude that the inflation rate equals the

rate of money growth minus growth in potential output

the only solution available to a country experiencing extremely high rates of inflation is to

reduce money growth

One of the ways inflation reduces aggregate demand is by

reducing real balances

Does money velocity fluctuate more in the short run, or the long run?

short run

The self-correcting mechanism to return the economy to potential output from output gaps is the change in

short-run aggregate supply

Why are the zero and nominal lower bounds not the same?

storage costs, storage, transportation costs, transportation, insurance costs, insurance

Potential output of the country when viewed over long periods of time

tends to rise over time

What is the difference between the GDP deflator and the CPI index?

the GDP deflator measures the cost of living whereas CPI measures the purchasing power of the dollar

What is the global saving's glut and how did that affect the financial crisis?

the global savings glut is when you save more than you spend. This led to a decrease in liquidity because people were wanting to save rather than invest.

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

the monetary policy reaction curve shifts to the right

what is the velocity of money?

the number of times each dollar is used

In the short run, the point on the aggregate demand curve where an economy will end up in equilibrium depends on

the short-run aggregate supply curve

One way the Fed can inject reserves into the banking system is to increase

the size of the fed's balance sheet through purchasing securities

the trend in real GDP growth is determined by

the structure of the economy and the rate of technological progress, which is fairly stable

To use money growth as a short-term monetary policy instrument, a central bank must believe that

there is a stable link between the monetary base and the rate of inflation

A good monetary policy instrument is

tightly linked to monetary policy objectives

Federal Funds Loans are

unsecured short term loans of reserves between banks

Key assumptions behind the quantity theory of money include that the

velocity of money is constant

Does money growth reduce the purchasing power of money?

yes, but only if money demand is constant

The <blank1> lower bound is the notion that nominal interest rates cannot go below zero, whereas the <blank2> lower bound is the rate at which intermediaries will switch to holding cash.

zero; effective