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Monetary Policy and Financial Institutions Essays

Seminar Exercises 16 (to take place in Week 20 starting 11th March 2013) 1) Please say whether the following statements are true or false:
a. The main functions of money are the medium of exchange, store of value and unit of account.

b. The monetary base is cash in circulation plus bank deposits.

c. Money supply is monetary base plus bank deposits.
d. When the Central Bank acts as a lender of last resort, it is making sure that banks have the money they need to continue to operate.

e. The discount rate allows the Central Bank to lend money to financial institutions which are running short of funds.

f. The interest rates are the instrument of fiscal policy.
Multiple Choice:
2) The Central Bank’s control over interest rates, direct lending to financial institutions and other policy tools is called:
a. fiscal policy.
b. monetary policy.
c. discount policy.
d. margin controls.
3) Which one of the following is among the Central Bank’s tools to control short-term interest rates?
a. Open market operations
b. Raising or lowering taxes on financial institutions
c. Limits on credit card interest rates
d. Controlling the demand for money
4) Which of the following is not one of the main goals of monetary policy?
a. Controlling inflation
b. Smoothing out the business cycle
c. Ensuring financial stability
d. Balancing the federal budget
5) Liquidity is:
a. A swimming pool full of water.
b. The price of oranges under hot weather.
c. The ease with which an asset can be turned into money without losing its value.
d. The speed at which assets can be exchanged regardless of possible effects on prices.
6) People who have bought a house using an adjustable rate mortgage are most likely to be hurt by:
a. an increase in the inflation rate.
b. an increase in the amount of the Central Bank’s short-term lending to financial institutions.
c. a decrease in the reserve requirement.
d. an increase in the interest rate set by the Central Bank.
Questions:
7) Calculate M0 and M4.
Sight deposits = 60; time deposits = 120; banks’ cash reserves = 4; currency in circulation = 24, building society deposits = 40.
8) How do Commercial banks create money? What happens if the reserve ratio is 100 per cent?
9) When should a Central Bank act as a lender of last resort?

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