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Economics of Money and Banking Coursera Quiz Answer

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Week- 4

Banking as a Clearing System, continued

 

1.
Question 1
All of the following are correct statements about the Fed Funds market, as compared to the repo market, except one. Which one is FALSE?

1 point

  • Repo dealers make markets in securities as well as markets for money
  • Dealers are more important than brokers because their balance sheets are monitored by the Fed
  • Repo markets can function as a channel for inter-corporate borrowing and lending, but the Fed Funds market cannot
  • Repo markets are accessible to a wider class of economic agents
  • Both Fed Funds and repo provide mechanisms for flow of funds between banks

2.
Question 2
After the global financial crisis, the overnight repo rate was for a while persistently higher than the overnight Fed Funds rate, whereas previously it had been lower. Which of the following is NOT a possible explanation?

1 point

  • Before the crisis, the Fed was trying to encourage borrowing at the Fed Funds rate to expand short term credit
  • After the crisis, the Fed was generally trying to foster elasticity by keeping the better money at a discount
  • Before the crisis, the Fed was generally trying to impose discipline by keeping the better money at a premium
  • After the crisis, default risk was no longer priced positively
  • Eurodollars sold at a premium

3.
Question 3
Why would a bank seek financing on the Eurodollar market instead of the Fed Funds market?

1 point

  • Interest rates are higher in Eurodollar markets
  • Eurodollars are secured whereas Fed Funds are not
  • Greater liquidity in Eurodollar markets due to greater presence of dealers
  • Eurodollar loans are available for terms longer than one day
  • The Fed Funds market is not available to banks outside the US

4.
Question 4
Which of the following statements is correct regarding the expectations hypothesis of the term structure of interest rates?

1 point

  • Foreign interest rates are always higher than domestic interest rates
  • The hypothesis provides a scientific explanation for the liquidity premium in the term structure
  • Empirically, the forward rate tends to be greater than the expected (or realized) spot rate, which contradicts the expectations hypothesis
  • The expected future spot rate should be greater than the forward rate in order to compensate for risk
  • Arbitrage ensures that the hypothesis holds at all times, except during crisis

5.
Question 5
Which of these statements are FALSE regarding uncovered interest parity (UIP)?

1 point

  • Studies find that high yielding currencies tend to appreciate, which is just the opposite of UIP prediction
  • Arbitrage ensures covered interest parity holds, but not uncovered interest parity
  • Empirical studies find that high yielding currencies tend to depreciate relative to low yielding currencies
  • It fails to hold empirically, while covered interest parity holds
  • Forward exchange rates tend to be biased estimators of future spot exchange rates

6.
Question 6
Suppose the Royal Bank of Scotland commits to making a 4-month dollar-denominated loan to one of its customers 2 months from now. Which of the following is least likely to be a part of RBS preparation for funding the loan?

1 point

  • Borrow six-month Euroyen to lock in Yen funding cost
  • Accept a six-month dollar deposit today
  • Borrow in the Eurodollar market two months from now
  • Accept a six-month pound deposit today, and hedge foreign exchange risk in forward exchange market
  • Purchase a forward rate agreement to lock in funding cost

 

 

Week- 5

Banking as Market Making

 

1.
Question 1
All of the following EXCEPT one is a property of an illiquid market. Which one does not belong?

1 point

  • Attempts to buy or sell tend to move prices around a lot
  • Prices tend to be inefficient, i.e. different from fundamental value
  • Agents cannot buy or sell quickly
  • Agents cannot buy or sell large quantities easily
  • Dealers in illiquid markets are well capitalized

2.
Question 2
Which of the following statements about the banking system of Bagehot’s day is INCORRECT?

1 point

  • The Bank of England could not lend freely in the face of external drain because of its very limited gold reserves
  • The central bank could supply an internal drain because it was at a higher level in the money-credit hierarchy than other banks
  • The Bank of England could lend freely to meet an external drain because of its massive gold reserves
  • A bank with too many discounts and too few notes could borrow from other banks using rediscount
  • The division of the Bank of England into separate Banking and Issue departments served to keep notes scarce, and so acted as a mechanism of discipline

3.
Question 3
Which of the following BEST describes the Bagehot Principle?

1 point

  • In times of crisis, insist on market valuation of all collateral, and for safety lend only a fraction of that value
  • In times of crisis, lend freely at a high rate against good security
  • Raise interest rates in booms, and lower them in recessions, to stabilize aggregate income
  • In times of crisis, lend selectively at market rates, but only to those who you think will survive
  • In times of crisis, lend freely at a low rate to prevent insolvent borrowers from failing

4.
Question 4
Which of the following is NOT true about the discount mechanism in the “world that Bagehot knew”?

1 point

  • The discounting bank raises its quoted discount rate to discourage demand for discount, and lowers to encourage
  • The market rate of interest depends on the marketwide balance between cash inflow from maturing bills and cash outflow from new discounts
  • The discounting bank can avoid liquidity risk by creating deposits rather than lending its note reserve
  • Discounting banks change their quoted discount rates in order to balance their own cash inflow and outflow
  • Banks ensure their own future liquidity by arranging a portfolio of bills maturing at different dates

5.
Question 5
According to our model of dealer behavior, if the demand for a particular security exhausts the dealer’s inventory, which of the following is the dealer’s MOST likely response?

1 point

  • Go short by using reverse repo to acquire additional securities to sell, but raise the selling price
  • Lower the ask (selling) price
  • Lower the bid (buying) price
  • Stop quoting that security and lower the price on other securities to attract the demand
  • Borrow money from the clearing bank in order to buy more securities to replenish the inventory

6.
Question 6
Which of the following MOST accurately characterizes the economics of the dealer function?

1 point

  • Dealer position limits are an artificial imposition of regulation
  • A fall in the bid-ask spread encourages more dealers to enter the market
  • Dealers serve a social function by keeping prices at their fundamental value
  • Dealers make money by keeping prices constant even as demand fluctuates
  • Value based traders establish the outside spread within which price fluctuates

 

Week- 6

Banking as Market Making, continued

 

1.
Question 1
When the Treynor model is adapted to the money market, all of the following are true, EXCEPT…?

1 point

  • Quotes are in yields, not prices, so the bid is higher than the offer
  • The dealer is primarily concerned about exposure to price risk
  • The dealer is willing to take on more liquidity risk if he is compensated by higher expected profit
  • The dealer quote curve slopes up
  • The dealer is primarily concerned about liquidity risk

2.
Question 2
Which of the following BEST characterizes the economics of a security dealer who funds his long and short security positions in the repo and reverse money markets?

1 point

  • The dealer increases and decreases exposure to price risk in proportion to liquidity risk
  • The dealer changes yield quotes to control exposure to liquidity risk
  • The dealer changes price quotes to control exposure to price risk
  • The dealer is price taking in competitive markets
  • The dealer uses both price and yield quotes in order to control exposure to both price and liquidity risk

3.
Question 3
Considering the relationship between traditional banking and shadow banking, which of the following statements is INCORRECT?

1 point

  • In modern banking, the key prices are determined in competitive dealer markets, both capital markets and money markets
  • Both traditional banking and shadow banking involve creation of private money of various types
  • The traditional picture of banking emphasizes allocation of saving from household depositors to business investors
  • Both systems face solvency risk, but there is no liquidity risk for shadow banking since it can always raise funds in liquid wholesale money markets
  • The shadow banking system involves a shift from loan based credit to market based credit

4.
Question 4
Consider monetary transmission during tight monetary policy. Which of the following is NOT a link in the transmission mechanism?

1 point

  • The Fed raises the Fed Funds target rate
  • Economic impact depends on the effect on dealer behavior
  • Higher profit expectations bid up the long term bond yields
  • The rise in Fed Funds lowers the profitability of the liquidity spread for dealers unless the term rate rises proportionately
  • A rise in the term rate raises funding cost for bond dealers, so lowering expected profit on existing bond inventories

5.
Question 5
Which of the following statements about monetary policy is/are INCORRECT?

1 point

  • Monetary policy is all about expanding and contracting the overall size of the Fed’s balance sheet
  • According to the Taylor Rule, the Fed should raise interest rates when inflation exceeds the target
  • Monetary policy is all about shifting portfolio allocation on the asset side of the Fed’s balance sheet
  • Monetary policy is all about shifting portfolio allocation on the liability side of the Fed’s balance sheet
  • The appropriate stance of monetary policy depends on the balance of elasticity and discipline in the system as a whole
  • Control of short term rates gives the Fed some measure of control over both the quantity of credit and the price of credit

6.
Question 6
Which of the following is the most important reason for a central bank NOT TO INTERVENE during a liquidity crisis?

1 point

  • Liquidity problems in any market can lead to liquidity problems in the government securities markets
  • A fall in security security values means collateral value goes down, making refinance more difficult
  • Uncontrolled liquidation can sweep away good firms as well as bad firms
  • A fall in consumption spending can lead to a multiplier effect that aggravates the crisis
  • Relaxing the survival constraint prevents liquidation of bad investments

 

Week- 7

Midterm

 

1.
Question 1
Which of the following items best captures the concept of liquidity reserves for the Fed (the central bank of the United States)?

1 point

  • Dollars
  • Gold + SDRs + foreign currency
  • Gold
  • Federal Reserve Notes

2.
Question 2
Which of the following IS a property of Fed Funds?

1 point

  • Intraday credit
  • Interbank credit
  • Asset of the Fed
  • Liability of the Fed

3.
Question 3
Which of the following statements about the payment system is FALSE?

1 point

  • In an ideal credit system, surplus banks lend to deficit banks
  • When a bank runs a daylight overdraft, the balance sheet of the Fed contracts
  • When a bank borrows in the Fed Funds market, the balance sheet of the Fed neither expands nor contracts
  • Elasticity in the wholesale money market is the source of elasticity in the retail payments system

4.
Question 4
Which of the following statements about the term structure of interest rates is TRUE?

1 point

  • According to the expectations hypothesis, long rates should be higher than short rates to compensate for risk
  • Empirically, the forward rate seems to be an upwardly biased estimate of the future spot rate
  • The expectations hypothesis explains the persistent liquidity premium in long term interest rates
  • Arbitrage ensures that the expectations hypothesis holds at all times

5.
Question 5
Which statement is TRUE regarding uncovered interest parity (UIP)?

1 point

  • UIP is a generalization of covered interest parity
  • Arbitrage ensures that UIP holds, except in crisis
  • Forward exchange rates tend to be biased estimates of future spot exchange rates
  • Empirical studies find that low interest rate currencies tend to appreciate relative to high interest rate currencies

6.
Question 6
Each of the following is a property of an illiquid markets, EXCEPT…?

1 point

  • It is difficult to buy or sell large quantities
  • Dealers in illiquid markets are well-capitalized
  • Agents cannot buy or sell quickly
  • Attempts to buy or sell tend to move prices a lot

7.
Question 7
Which of the following BEST characterizes the economics of a security dealer who funds his long and short security positions in the repo and reverse markets?

1 point

  • The dealer is a price taker
  • Such a dealer is limited to matched book
  • The dealer changes price quotes to control exposure to price risk
  • The dealer is able to control exposure to price and liquidity risk independently

8.
Question 8
Which of the following BEST describes the Bagehot Principle?

1 point

  • In times of crisis, lend freely at a high interest rate
  • In times of crisis, lend freely at a low rate to help banks rebuild profitability
  • Intervene to stabilize the economy by raising rates in good times and lowering them in bad times
  • Safeguard liquidity by carefully scrutinizing potential borrowers

9.
Question 9
Each of the following is true about the economics of the dealer function, EXCEPT…?

1 point

  • Dealers seek profit by supplying market liquidity
  • Value based traders establish the outside spread within which price fluctuates
  • Dealers absorb fluctuations in net demand and supply by taking the imbalance onto their own balance sheet
  • A tight bid-ask spread attracts dealers to make markets

10.
Question 10
What is the MOST salient difference between traditional banking and so-called shadow banking?

1 point

  • Traditional banking involves creation of money substitutes
  • In shadow banking, key prices are determined in competitive dealer markets
  • Shadow banking involves solvency risk, whereas traditional banking involves liquidity risk
  • Shadow banking involves liquidity risk, whereas traditional banking involves solvency risk

 

Week- 8

International Money and Banking

 

1.
Question 1
Under a gold standard, all of the following are true, EXCEPT…?

1 point

  • All convertible currencies are at the same level in the hierarchy of money and credit
  • Gold is the ultimate international money
  • The exchange rate between two currencies can deviate from the mint par ratio because of the cost of shipping gold
  • Gold is an asset that is no one’s liability
  • Each currency has its own mint par

2.
Question 2
All of the following statements about the FX market are true, EXCEPT…?

1 point

  • Most derivative transactions have the dollar as one leg, and involve other majors, not minors
  • The dollar serves the function of an international currency, similar to the pound sterling prior to World War I
  • Empirically, market-determined forward exchange rates are biased estimates of future spot exchange rates
  • Only private agents, not central banks, can act as FX dealers
  • The FX market is fundamentally a money market, not a capital market

3.
Question 3
All of the following statements about FX theories are correct, EXCEPT….?

1 point

  • The survival constraint is the requirement that deficit countries find a way to settle with surplus countries
  • Legal tender laws establish the foreign exchange value of each currency relative to all the others
  • Covered Interest Parity conceives of the exchange rate as the relative price of tradeable assets
  • Chartalists link the origins of money to sovereign power, and view money as a creation of the state
  • Purchasing Power Parity conceives of the exchange rate as the relative price of tradeable goods

4.
Question 4
What was the significant difference between the US and UK proposals for the international monetary framework at Bretton Woods?

1 point

  • Banking school (US) versus Currency School (UK)
  • Private credit (US) versus public credit (UK)
  • Public credit (US) versus private credit (UK)
  • The US proposal would allow for flexible exchange rates, consistent with market principles
  • The UK proposal sought to make the survival constraint bind symmetrically on surplus countries as well as deficit countries

5.
Question 5
Which of the following BEST characterizes Mundell’s views on international money?

1 point

  • The international gold standard was a mistake and led to the Great Depression
  • Inconvertible national currencies can never serve effectively the functions of international money
  • Maintaining a constant value of gold is more important than maintaining stable prices
  • Economic and political instability in the 20th century were exacerbated by the lack of a genuine international currency
  • We should work towards a goal of fully flexible exchange rates, as this is consistent with free market principles

6.
Question 6
Which of the following MOST accurately characterizes some aspect of the international monetary system?

1 point

  • Global reach by huge hedge funds has effectively privatized the central banking role
  • The quantity of Special Drawing Rights outstanding today is unchanged since the establishment of the IMF at Bretton Woods
  • Price stability within countries, meaning low and stable inflation, leads to stable exchange rates between countries
  • The Eurodollar is the effective international reserve credit currency, a promise to pay US domestic reserve balances
  • Central banks failed to coordinate their actions during the recent financial crisis

 

 

Week- 8

International Money and Banking, continued

 

1.
Question 1
All of the following statements about foreign exchange dealers are true EXCEPT..?

1 point

  • In the least liquid FX markets, central banks set the inside spread, not just the outside spread
  • Dealers, both matched book and speculative, are willing to take on more risk only if they are compensated for it
  • A dealer buying FX spot and selling FX forward is hedged against price risk
  • A matched book dealer is exposed to liquidity risk, not price risk
  • The matched-book dealer profits from deviations from covered interest parity

2.
Question 2
Which of the following is NOT one of the mechanisms by a central bank may defend its currency against speculative attack?

1 point

  • Sell liquid assets, such as public debt, to put upward pressure on domestic interest rates
  • Borrow international reserves to buy domestic currency
  • Raise domestic interest rates to bribe foreigners to hold money balances rather than cashing them
  • Use international reserve holdings to buy domestic currency
  • Flood the market with liquidity by expanding balance sheet, buying foreign assets with domestic currency

3.
Question 3
Under a gold standard, all of the following statements are correct EXCEPT…?

1 point

  • The exchange rate can move away from mint par because of the cost of transporting gold
  • Profit-seeking dealers make markets inside the gold points
  • The survival constraint is more of problem for deficit dealers than for surplus dealers
  • When the price of foreign currency falls to the gold point, foreign exchange will be sold to central banks rather than price dealers
  • Balance sheet expansion can satisfy external drains, but not internal drains

4.
Question 4
Consider a dealer who is being asked to purchase FX and pay out dollars. Which of the following would provide incentive for the dealer to do that trade?

1 point

  • Positive report about US economic growth
  • Counterparties reduce their willingness to roll over the dealer’s funding liabilities
  • Spot rate and forward rate rise in tandem
  • Forward rate moves closer to expected spot rate
  • A positive differential between the FX forward rate and the expected spot rate

5.
Question 5
All of the following statements regarding (potential) arbitrage conditions are true, EXCEPT…?

1 point

  • The failure of uncovered interest parity provides an incentive for foreign exchange dealers to make markets
  • Uncovered interest parity is not a true riskless arbitrage condition because the future spot rate is unknown at the moment that the corresponding forward rate is determined.
  • According to covered interest parity, any change in the differential between forward and spot exchange rates must be accompanied by similar change in the overnight interest rate differential
  • Forward interest parity is a true arbitrage condition because all of the relevant interest rates, including term rate and forward rate, are known.

6.
Question 6
Consider a matched book FX dealer that is borrowing short and lending long in dollars. All of the following are true, EXCEPT…?

1 point

  • A matched book dealer relies on covered interest parity being true
  • He makes money by speculating on the difference between forward rates and expected spot rates
  • The dealer will be willing to take more risk if he is compensated for it
  • The dealer is exposed to liquidity risk, not price risk
  • The dealer will be willing to increase risk exposure only if he can buy spot relatively more cheaply than forward

 

Week-9

Banking as Advance Clearing

 

1.
Question 1
What was the central function of “shiftability” in the American system?

1 point

  • Shiftability allowed banks to raise funds by using the real bills discount mechanism
  • Shiftability made monetary policy, and hence markets, more transparent
  • Shiftability allowed banks to use their assets to raise cash as needed to meet short term liquidity calls
  • Shiftability allowed banks to open branches in other states
  • Shiftability prevented instability in financial markets

2.
Question 2
Which of the following is NOT correct about the role of banking for development finance?

1 point

  • A development bank mobilizes deposits for long-term capital loans to finance new development projects.
  • The ability of banks to create purchasing power simply by swapping IOUs means that development is not held back by prior available savings.
  • As Schumpeter emphasized, banks lend by creating new purchasing power for entrepreneurs who do not have it
  • The role of banking for development finance is very limited because safety requires banks to limit lending to short term real bills
  • Development finance involves mobilizing unused resources, thereby creating new economic activity.

3.
Question 3
All of the following statements about futures and forwards are true EXCEPT… ?

1 point

  • It is generally more expensive for a firm to lock in a forward rate of interest than to wait and pay the spot rate.
  • Forward interest parity means that the pricing of futures depends on the time structure of current spot interest rates.
  • A forward loan is generally more profitable for a bank than a spot loan. .
  • Banks and firms both use forwards and futures in order to hedge against price risk.
  • Futures and forwards are much the same in terms of cash flow, but not in terms of value since futures are marked to market whereas forwards are not.

4.
Question 4
Which of the following BEST characterizes the distinction between direct and indirect finance?

1 point

  • Direct finance involves more intermediation.
  • Indirect finance reduces risk, whereas direct finance simply transfers it
  • Direct finance is more efficient because there are fewer middlemen
  • Banking provides direct finance, whereas capital markets provide indirect finance
  • Direct finance involves the ultimate lender holding the promises to pay of the ultimate borrower

5.
Question 5
Which of the following statements about shadow banking is NOT true?

1 point

  • Regulations on traditional banking create incentives for shadow banking.
  • Shadow banking in the US is a recent phenomenon.
  • Shadow banking is illegal
  • Market liquidity is critically important for shadow banking, in order to price capital market collateral
  • Shadow banking involves money market funding of capital market lending.

6.
Question 6
Which of the following statements about banking during Bagehot’s time is NOT accurate?

1 point

  • The money market and capital market were more separated in Britain compared to the US.
  • The quasi-public Bank of England discount facility backstopped the British system, but in the US there was only the quasi-private New York Clearinghouse
  • Banks in Britain generally held shorter-term assets than banks in the US.
  • British banks relied more heavily on the timing of cash flows to provide liquidity, while US banks relied more heavily on money market funding and liquidity in the bond markets.
  • US banks safeguarded their liquidity by refusing to lend long term

 

 

Week- 11

Banking as Advance Clearing, continued

 

1.
Question 1
The following statements about interest rate swaps are all correct, EXCEPT…?

1 point

  • A bank that borrows short and lends long is, in effect, engaged in a swap, and so can hedge with an equal and opposite swap.
  • A long swap is more risky than a short swap
  • Something like a swap can be constructed with parallel loans, but it absorbs more balance sheet space
  • A long swap position pays fixed rate and receives flexible rate
  • In a swap that is constructed as a parallel loan, both parties still pay their original creditor the agreed rate over the life of the loan

2.
Question 2
All of the following statements about market making in swaps are correct, EXCEPT…?

1 point

  • Credit market imperfection creates incentive for swaps when it causes distortion of lending rates
  • Matched book dealing is not possible in swaps
  • Matched book swap dealing may net price risk, but still involves exposure to liquidity risk
  • Swap dealers make money by selling swaps at a different price than they buy swaps
  • Counterparty risk creates incentive for swaps because swaps have less such risk than the analogous parallel loan construction

3.
Question 3
In lecture we discussed how a corporate bond could be divided into three parts. What are they?

1 point

  • Risk-free asset, credit default swap, interest rate swap
  • Risky asset, credit risk, interest rate risk
  • Collateral, liquidity risk, credit risk
  • Counterparty risk, liquidity risk, price risk
  • Liquidity risk, interest rate risk, credit risk

4.
Question 4
Which of the following statements accurately characterizes the cash flow of a buyer of a CDS without mark-to-market features?

1 point

  • He makes or receives payments depending on fluctuation of the market price of the CDS
  • He pays a certain amount up front for the CDS, and receives another amount if the bond defaults
  • There is no net cash flow, because by construction CDS is zero net present value at inception
  • He pays a small amount in each time period, and receives a large amount in the case of default
  • He makes or receives payments depending on fluctuation of the price of the reference risky bond

5.
Question 5
All of the following statements about the CDS market are true, EXCEPT..?

1 point

  • Dealers sell CDS on individual bonds and hedge by purchasing CDS on an index
  • Holding a risky CDO plus CDS as insurance on that CDO entails more liquidity risk than simply holding a riskfree Treasury bond
  • The value of CDS fluctuates over time
  • The CDS market is more liquid than the market in the risky bonds referenced by CDS
  • CDS on sovereign debt makes no sense because sovereigns do not default

6.
Question 6
Which of the following statements about swaps is CORRECT?

1 point

  • Swap markets increase aggregate risk by expanding risk exposure to a multiple of the underlying referenced risky assets
  • Swaps are inherently in zero net supply
  • Swap markets replace traditional banking by replacing actual swap of IOUs with only notional swap of IOUs
  • Sovereigns who issue their own currency can never default, so credit default swaps make no sense in this case
  • The quantity of swap contracts is limited by the quantity of the underlying referenced risky assets

 

Week- 12

Money in the Real World

 

1.
Question 1
Which of the following is NOT a characteristic of shadow banking?

1 point

  • Money market funding
  • Capital market lending
  • Prices determined in dealer markets
  • Sharp separation of capital market and money market
  • Global funding of local lending

2.
Question 2
The following statements about traditional and shadow banking are all correct EXCEPT…?

1 point

  • The Fed provides the ultimate liquidity backstop for the shadow banking system
  • The traditional banking system provided the immediate liquidity backstop for the shadow banking system
  • The Fed provides liquidity backstop for the traditional banking system
  • The FDIC provides capital backstop for the traditional banking system
  • Funding liquidity implies market liquidity

3.
Question 3
For smooth operation of the new market-based credit system, fluctuation in the value of RMBS requires all of the following EXCEPT…?

1 point

  • Liquidity backstop for both money dealers and risk dealers
  • Efficient collateral flow through the dealer system
  • Elimination of counterparty risk through “too-big-to-fail”
  • Ability of ultimate risk holder to absorb losses
  • Both funding and market liquidity backstops

4.
Question 4
All of the following are central aspects of the “money view” EXCEPT…?

1 point

  • Explains current asset prices as a consequence of expected future values
  • Emphasizes the relationship between funding liquidity and market liquidity
  • Recognizes the important role of the central bank as ultimate provider of funding liquidity
  • Emphasizes liquidity and the survival constraint

Focuses on the problem of meeting cash commitments in a timely manner

5.
Question 5
Which of the following statements is MOST accurate?

1 point

  • Over the last thirty years, the central debate in economic discourse has been mostly between the finance view and the money view
  • The defining characteristic of the money view is that past promises are no constraint to current spending
  • The defining characteristic of the money view is that current spending is limited only by future income expectation
  • The economics view is characterized by the notion that income today results from capital investments in the past
  • The finance view and the economic view are quite similar, while the money view presents a stark contrast

6.
Question 6
Which of the following statements is MOST consistent with the views of Fischer Black?

1 point

  • The Fed should increase the money supply at a constant rate of growth
  • Business fluctuations can and should be smoothed by a combination of countercyclical fiscal and monetary policy
  • The operations of the Fed have little effect on the broader economy, or are counterproductive
  • The Fed should cut interest rates during business recessions in order to move the economy toward full employment
  • The Fed should target inflation by adjusting the interest rate

 

Final Exam

 

1.
Question 1
Under a gold standard, all of the following are true, EXCEPT…?

1 point

  • All currencies are at the same level in the hierarchy of money and credit
  • Exchange rates can differ from mint par because of the cost of shipping gold
  • Gold is the ultimate international money
  • Gold is an asset that is no one’s liability

2.
Question 2
What was the significant difference between the US and UK proposals at Bretton Woods?

1 point

  • Private credit (US) versus public credit (UK)
  • Keynes’ bancor proposal sought to shift the balance toward elasticity, while White’s IMF proposal sought to shift the balance toward discipline
  • The US proposal promoted flexible exchange rates, consistent with market principles
  • Banking School (US) versus Currency School (UK)

3.
Question 3
Which of the following MOST accurately characterizes current international monetary arrangements?

1 point

  • Foreign banks rely in the first instance on Eurodollars, mere promises to pay actual dollars, as the international reserve
  • The quantity of Special Drawing Rights issued by the IMF is unchanged since Bretton Woods
  • Low and stable inflation in each country independently is the best guarantor of stable exchange rates between countries
  • Global reach by huge hedge funds has effectively eliminated the need for government controlled central banks

4.
Question 4
Under a gold standard, all of the following statements are correct EXCEPT..?

1 point

  • The survival constraint is more of problem for deficit countries than for surplus countries
  • Central banks establish the outside spread in foreign exchange markets
  • Balance sheet expansion by the central bank can satisfy external drains, but not internal drains
  • Profit-seeking dealers establish the inside spread in foreign exchange markets

5.
Question 5
All of the following statements about (potential) arbitrage conditions are correct EXCEPT….?

1 point

  • According to covered interest parity, any change in the differential between domestic and foreign term interest rates must be accompanied by a similar change in the overnight interest differential
  • Uncovered interest parity is not a true riskless arbitrage condition because the future spot rate is unknown at the time that the corresponding forward rate is determined
  • Covered interest parity is a true arbitrage condition because all of the relevant prices are observable today
  • The failure of uncovered interest parity provides an incentive for foreign exchange dealers to make markets

6.
Question 6
What was the central function of “shiftability” in the American system?

1 point

  • Shiftability made monetary policy more transparent
  • Shiftability allowed banks to use their assets to raise cash as needed to meet short term liquidity calls
  • Shiftability allowed banks to raise funds by using the real bills discount mechanism
  • Shiftability prevented instability in financial markets

7.
Question 7
All of the following statements about banking in Bagehot’s time are correct EXCEPT…?

1 point

  • Funding liquidity was more important in Britain, and market liquidity was more important in the US
  • US banks were more willing than British banks to lend long term because they had access to the discount window as a liquidity backstop
  • British banks safeguarded their liquidity by refusing to lend long term
  • The money market and the capital market were more distinct in Britain than in the US

8.
Question 8
All of the following statements about interest rate swaps are correct EXCEPT….?

1 point

  • Interest rate swaps involve exactly the same counterparty risk as the analogous parallel loan construction
  • In a swap constructed as a parallel loan, both parties pay their original creditor as well as their new swap counterparty
  • Something like a swap can be constructed as a parallel loan, but it absorbs more balance sheet space
  • A long swap position pays a fixed rate and receives a flexible rate.

9.
Question 9
Only one of the following statements about swaps is correct. Which one?

1 point

  • A swap contract moves risk from one counterparty to another
  • Sovereigns can never default on debt issued in their own currency, so credit default swaps on sovereign debt make no sense
  • The quantity of swap contracts is limited by the quantity of the underlying referenced risky assets
  • Swap markets increase aggregate risk by expanding side bets on fundamentals

10.
Question 10
All of the following are central aspects of the “money view” EXCEPT…?

1 point

  • Focuses on the problem of meeting cash commitments as they come due
  • Emphasizes the relationship between funding liquidity and market liquidity
  • Explains current asset prices as a consequence of expected future cash flows
  • Emphasizes the importance of the central bank as ultimate provider of funding liquidity

By JAMD Bokhtier

This is JAMD Bokhtier's website.He is a passionate Marketer who dreams,talks,learns and teaches all about Marketing,the owner & the founder of "Life Style Consultant", a specialist in "Digital Marketing" and a Sophophilic.

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