FIN 301/ECON 210-10
Money and Banking
SAMPLE FOURTH QUIZ
Answer all the questions. Include calculations and/or reasons with your answers wherever appropriate. More credit will be given for correct reasoning than for correct numbers.
- Give a sample balance sheet for the Fed with total assets of $100. Where is the monetary base?
- What does the Fed do if it wishes to increase the base?
- Give a sample balance sheet for a commercial bank with assets of $100.
- What do banks do to increase the money supply?
- How does the Fed’s decision in 2009 to begin paying interest on bank reserves change the answer to question 4?
- In the world according to Keynes the Fed wishes to stimulate the economy.
- What does it do?
- How does this stimulate the economy?
- How might this not work just when we need it most?
. 7. In Milton Friedman’s Modern Quantity Theory what determines the quantity of money demanded? Why are interest rates much less important than in the Keynesian version?
8. In any version of the quantity theory, what is the price of money?
9. True, False, or Uncertain? Explain.
. “Inflation is good for borrowers and bad for lenders.”
Could you construct a corrected version of this saying?
- You are one of the Crusoes with a personal discount rate of 20%. You have one plot with a rate of return of 50% and 1.00 bu. of wheat. You are facing an interest rate of 10%.
(a) What do you offer to do? Do you plant or not?
(b) When do you want to consume, this year or next year?
(c) What is your net worth? How much of this comes from the plot?
- The gavel is just about to come down on an interest rate of 15%, when a Crusoe shouts “Wait. I have news. I have just discovered a cave full of guano for fertilizer. Every plot will now have a 5% higher yield.” The Crusoes rerun the auction. Will the new interest rate be lower than 15%, higher than 15%, or just 15%? Explain.
- The new Trump administration fulfills Trump’s promise to lower corporate tax rates and eliminate many regulations. What will happen to interest rates? Explain.
13. Explain how high interest rates, deposit insurance, and deregulation combined to produce the S&L collapse of the 1980’s.