Question

QUESTION 6

Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant:

		a- The net worth of both firms will increase and by the same amount.
		b- Neither firm's net worth will change.
		c- Firm A's net worth will increase more than Firm B's.
		d- Firm B's net worth will increase more than Firm A's.

QUESTION 7

The Japanese experience of the 1990s shows:

		a- sometimes monetary policy does not work.
		b- central bankers should not try to counter the business cycle.
		c- monetary policy always works.
		d- The Japanese experience of the 1990s shows:

QUESTION 8

To compensate for the collapse of intermediation and the fragility of financial markets during the 2007-2009 financial crisis, central banks deployed all but which of the following unconventional tools:

		a- Forward guidance
		b- Targeted asset purchases
		c- Lowering interbank lending interest rate targets
		d- Quantitative easing

QUESTION 9

Which of the following statements is most correct?

		a- There is evidence that high real interest rates are followed by lower levels of growth.
		b- High real interest rates cause recessions.
		c- Central bankers raise real interest rates to cause recessions.
		d- There is no evidence that high real interest rates are followed by lower levels of growth.

QUESTION 10

Between September 2007 and December 2008, the FOMC reduced the target federal funds rate 5.25 percentage points toward zero. A reason for this was that the FOMC:

		a- was acting preemptively.
		b- feared over stimulating the economy.
		c- was taking a wait and see approach to previous cuts.
		d- was feeling political pressure to act.

Answer 1

6) Option C: As A's cost of liabilities would reduce as rates drop while B's cost would remain the same

7) Optoin A: Due to demographic factors in Japan, the inflation has not picked up despite the Bank of Japan keeping rates low for an extended period of time. It has resulted in lost decade in Japan.

8) Option A: The Federal Reserve has resorted to low interest rates and asset purchases to tide over the GFC

9) Option A: Higher real rates tend to depress business fixed investments resulting in periods of low growth

10) Option A: The Federal Reserve would have anticipated the systemic repurcussions of the GFC and the slowdown in the economy that can result. Therefore it acted preemptively by cutting rates to support the economy.