Reference no: EM131022177

Midterm 2

Identifications: Identify and briefly explain the importance of any TWO (2) of the following:
1. Non-borrowed monetary base
2. Lender of last resort
3. CAMEL Rating
4. Float

Short Responses: For any THREE (3) of the following statements, state whether you AGREE, DISAGREE, OR CANNOT DECIDE. Explain your position in a paragraph. Your grade will be based largely on your explanations.

1. The Federal funds rate equals the discount rate and both move in the same direction.

2. When the required reserve ratio is zero, the money supply is infinitely large.

3. Lowering of the discount rate by the Fed implies that the Fed is moving to a more expansionary monetary policy.

4. From a macroeconomic standpoint, the more independent a central bank is from the government, the better.

5. An interest rate cut by the European Central Bank will increase output in the U.S. economy.

6. Open market operations can be directed at achieving a desired quantity of balances (as specified by the FOMC) and a desired price (federal funds rate) simultaneously.

Essays: In your SECOND BLUEBOOK, answer any TWO (2) of the following:

1. Using money multiplier theory and evidence from the Great Depression of the 1930s, explain how bank failures and bank panics lead to a rapid decline in the money supply. Why was the Fed's monetary policy ineffective to stem the abrupt nosedive in the money supply?

2. Explain how the following four players affect the money supply: the Fed, depositors, banks, and borrowers from banks.

3. How did financial innovation and new legislation (DIDMCA and Garn-St. Germain) lead to S&L and bank failures in the early 1980's?

4. Suppose the government authorizes a new spending program, holding taxes constant, that results in overall government spending increasing by $10 billion more than its current level of spending. Describe the financing options open to the government with regard to this new spending program and then evaluate the new spending program in light of its effect on the monetary base and hence, the money supply. Be clear and precise in your discussion of the various options available to the government.