Question

54. In which market would a bank with excess reserves attempt to sell reserves to a bank with insufficient reserves? (a) Treasury bill market? (b) federal funds market; (c) bond market; (d) NASDAQ.

55. When compared with monetarist theory, Keynesian theory places greater emphasis on: (a) changes in supply of money as a determinant of GDP and inflation; (b) totally discounts the role of monetary policy in determining GDP and inflation; (c) fiscal policy as a determinant of money supply (d) changes in interest rates as a prerequisite to GDP growth and inflation.

56. Over time, the flattening and shifting inward of the traditional Phillips Curve suggests that: (a) the relationship between inflation and unemployment is stronger than ever; (b) a 1% change in the inflation is now associated with smaller changes than before in the unemployment rate; (c) every unemployment rate is now associated with a lower inflation rate than previously; (d) the U.S. now has an R* much higher than 1%.

57. According to the modern Phillips Curve, current inflation statistically is the summation of: (a) the real inflation rate and inflation expectations; (b) the previous period’s inflation and the product of short-run real economic growth and the sensitivity of inflation to it; (c) productivity growth and growth in the labor force; (d) labor compensation and productivity growth.

58. Almost always, the normal Treasury yield curve tends to: (a) be unaffected by monetary policy; (b) be monotonically upward sloping; (c) demonstrate that as time to maturity increases, expected yields tend to decline: (d) be affected by inflation expectations.

59. All things remaining the same, the yield on a five-year Treasury note can be expected to revert to which level? (a) the Fed’s 2% inflation target; (b) the level of inflation expectations over a 5-year period; (c) the average expected yield on Treasury securities 1, 2, 3, 4, and 5 years from maturity; (d) the S&P 500 dividend yield.

Answer 1

52. Answer (A) as Open market operations by Fed include purchasing government securities as it increases money supply in economy as it results in increase of reserves of banks and they then increase their loans and investments. Printing without security ( deficit financing) would result in inflation to a large extent.

53.Ans C Fed's most important ploicy rate is 10 year treasury notes as it is backed by full faith, there is very less risk for default, it is a benchmark which guides other interest rates and used as proxy for important financial matters such as mortgage rate.

54.Ans B Federal fund market is where banks with excess reserve lend at fed fund rate on an overnight basis to banks with lower reserves.

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