Please read the instructions: Answer following different problems provided. In answering the problems, you should emphasize the line of reasoning that generated your results. It is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly /abetted and must show directional changes. Use a pen with black or dark blue ink. Please indicate your name, program and student ID on the blue book. Good luck:
1. Betty Davis has the following assets:
$100 in her wallet; $Boo in her checking account; $1,000 in her savings account; A %20 traveler's check from her last business trip to China; A $300 outstanding credit card bill; $3,000 in a small certificate of deposit; A car worth $5,000; A house, worth $200,000.
1ai. Identify which are in M1, which are in M2, or in neither Mi nor M2.
1aii. Suppose she takes the $100 in her wallet and deposits it in her checking account.
What is the change in M1 and M2?
1b. Suppose she takes $400 from her checking account and deposits it in her savings account. What is the change in Mi and M2?
1c. How would an increase in the value of the Canadian Dollars affect American businesses?
1d. When the US Dollar is worth much more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans? Are U.S companies that manufacture jeans happier when the dollar is strong or when it is weak? What about an American company that is in the business of importing jeans into the United States?
1e. 'In a world without information costs and transaction costs, financial intermediaries would not exist.' Is this statement true, false, or uncertain? Explain your answer.
1f. The US President announces that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.
1g. Discuss the roles of the key financial institutions serving as intermediaries between investors and firms.
2a. Describe the structure of the Federal Reserve.
2b. How many boards of governors are does the Fed have and how long are their terms? Who appoints them? And how many regional banks does the Fed have?
2C. Is the role (or function) of the Fed only to conduct monetary policy (e.g. raise or lower interest rates)?
2d. Identify the three tools of monetary policy, and what the Fed would do to increase (or decrease) the (growth of the) money supply.
2e. Explain the sequence of links connecting an expansionary monetary policy with interest rates, intended investment, output, exchange rate, and trade.
2f. If the Fed buys a $5 million worth of securities from Mr. Rockefeller; (i) show the changes in the relevant balance sheets if Mr. Rockefeller decides to deposit the proceeds in First National Bank (FNB);
2g. If Mr. Rockefeller keeps the proceeds as cash, show the changes in the relevant balance sheets.
3. Suppose the economy is characterized by inflation problems and an unstable banking system. Use the quantity equation, M x V=P x Y, to answer the following questions:
3a. What assumptions does the classical theory make about the variables in the quantity equation?
3b. What assumptions does monetarist theory make about the variables?
3c. What assumptions do Keynesian-oriented theories make?
3d. Discuss the portfolio theory of money demand.
3e.How does monetarist theory uses the quantity equation to explain the deflation and fall in output in the U.S. during the Great Depression?
3f. How might a Keynesian-oriented theorist use the quantity equation to explain the cause of hyperinflation?
3g. Provide two cases where inflation is caused by some factor other than an increase in the money supply.
4. Suppose the Fed buys $32 million worth of government bonds from First National Bank (FNB).
4a. Show the changes in the Fed's Balance sheet. 4b. Show the changes in the FNB's balance sheet.
4c. Explain the law of one price and the theory of purchasing power parity. Why doesn't the purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates?
4d. Discuss the implications of the deviations from the purchasing power parity for countries' competitive positions in the world market.
4e. What is the yield to maturity on a one year, $1,000 treasury bill with a current price of %900?
4f. What is the price of a 10-year coupon bond with a face value of $1,000 at 12.25% yield to maturity and eighty years to maturity?
4g. What is the present value of James' $250,000 mortgage to be paid in 20 years if the interest rate is 15%?
5a. "The Canadian dollar was down to 98 cents US on news that China's international trade growth slowed".
5b. How does a lower Canadian dollar exchange rate influence monetary policy transmission?
5c. Would a fall in the exchange rate mainly influence unemployment or inflation?
5d. What are the three roles of money? And what are two types of money?
5e. If your broker has been right in her five previous buy and sell recommendations, would you continue listening to her advice?
5f. Explain how firms and investors trade money market and capital market securities in the financial markets in order to satisfy their needs.....
5g. If Angela needs a Si,000 loan at 5%, what is the yearly payment to the bank after z years?
6a. Explain the traditional interest rate channel for expansionary monetary policy.
6b. Explain how a tight monetary policy affects the economy through this channel.
6c. Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.
6d & e. What factors determine money demand in Friedman's modern quantity theory? How does each affect money demand? What determines velocity in Friedman's theory? What effect do interest rates have on velocity?
6f. In the liquidity trap the demand for money becomes horizontal. Depict this graphically. Demonstrate and explain why increases in the money supply do not affect interest rates, and thus aggregate spending, in the liquidity trap.