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6) Suppose that the European central bank increased money supply right after you bought the European financial assets. How that change might affect the expected return you will get at the end of the period as an American investor? (Use graphs)

If a central bank decreases interest rates, then gradually: a. the country's gross domestic product is likely to decrease. b. foreign exchange rate is likely to appreciate. c. demand for exported goods and services is likely to increase. d. flows of investment funds into the country are likely to decrease.

All else being equal, if a central bank buys government bonds from the market it would: a. mean savings in the economy are likely to increase. b. mean the supply of loanable funds would move to the left. c. increase the money supply. d. increase interest rates.

Banks are more likely to create M-1 when the economy is expanding than when it is experiencing a recession. Do you agree or disagree? Why?

2. If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investmemt)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?

When nominal interest rates have hit the zero lower bound, can central banks affect the interest rates? Select one: OA. Yes: since the zero lower bound applies to nominal rates, not real rates, and it is real rates that are relevant for investment decisions. OB. No: once the zero lower bound is hit, central banks can no longer employ interest rates to stimulate economic activity. OC. Yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the banks' traditional method. OD. A and C.

H5. The bank have an incentive to value the new securities at a higher price because they will gain more. Is that a good or bad strategy? Explain why

3. Consider the monetary neutrality. Suppose that the central bank changed the money supply. According to economists’ assumption on monetary neutrality, could the change affect the employment in the short-run? How about in the long-run? Short-run: Long-run:

part-a: What is the difference between direct finance and indirect finance?  part-b: What are the main institutions in the direct finance system of an economy? What are the main institutions that constitute the indirect finance system in a country? part-c: What are the sources of national saving in a closed economy? Does a government increasing taxes and / or social security transfers impact the amount of national savings in a closed economy? Why or why not? (Hint: Consider the savings identity for this question.)  part-d: Where does the demand for loanable funds come from in a closed economy? How does a government adopting a policy of taxing investment from the private sector impact the demand for loanable funds? What happens to the equilibrium interest rate following this policy? Illustrate using the supply and demand in the market for loanable funds.

All else being equal, if a central bank sells government bonds from the market it would: a. decrease the money supply. b. decrease interest rates. c. mean the supply of loanable funds would move to the right. d. most likely decrease savings in the economy.

What reforms to the financial system might reduce its exposure to systemic risk?

3. Open market operations versus discount loans Consider an expansionary open market operation. Suppose the Federal Reserve buys government securities from the nonbank public. Suppose that the sellers of government securities cash the checks and hold on to the cash. Then, ceteris paribus, bank reserves do not change ▼ currency in circulation increases , and thus the monetary base will increase Suppose now that the Federal Reserve wants to increase the monetary base by increasing bank reserves only. Which of the following actions enables the Fed to achieve its goal? ○ Lend to commercial banks through the term auction facility Lend to the non-banking public at the discount window Require the non-banking public to repay discount loans Buy the government securities exclusively from the non-banking public By lending to commercial banks through the discount window, the Federal Reserve alters the monetary base and thus affects

The market for capital Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. Q1. Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates      2. Short-term interest rates Q2. If the inflation rate was 3.20% and the nominal interest rate was 4.20% over the last year, what was the real rate of interest over…

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Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. S2 S1 16 D Equilibrium INTEREST RATE, r (Percent)

If the Fed buys loans from banks, what is the impact on the Loanable Funds Market? A) Decreases the supply of loanable funds and lowers the interest rate. B) Increases the supply of loanable funds and lowers the interest rate. C) Decreases the supply of loanable funds and raises the interest rate. D) Increases the supply of loanable funds and raises the interest rate.

Q (B) Which of the following statements about central bank objectives are​ true?   A. Central banks can have several​ objectives, but their actions need to provide a​ “nominal anchor” for the economy   B. All statements are true   C. A strict inflation target is a way to provide a​ “nominal anchor” for the economy   D. In​ principle, one of the goals of a central bank could be to slow down climate change

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