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M &B              Final 'Exam' Review Questions           Ray Butler

1) Recall our class discussion of the "Stock Market & Interest Rates" and explain how changes in interest rates can influence the value of the firm's stock price and influence the value of your portfolio. In other words, do you see how Alan Greenspan and the 'Fed' can affect the financial markets- stock and bond markets? 'Value of the Firm Model' graphic- class resources page.   Dr. Ed Yardeni's 'Economic Network', "Markets" chart.

2) According to David Gordon in his article on Saving & Investment, the empirical evidence on the ‘determinants' of investment expenditure support the view that personal saving has ‘direct and indirect effects' on the flow of investment. Thus, he recommends 'encouraging' Saving as the appropriate policy for 'raising' Investment expenditure. T/F, Explain. Illustrate with the Leakage & Injection Model- see 'Models', class resources page.

3) While Marx's Model of Capitalism  (M-C....P....C'-M') is interesting, it tells us very little about the origins of crisis and the nature of the business cycle. T/F, Explain. See class notes, the "Money Fetishism and the Paper Economy" reading, and graphic- 'Models', class resources page.   Marx's Model, in Robert Heilbroner, "Three Economists".

4) The class video "The Fed: Our Nation's Central Bank" informed us that the Federal Reserve was created only for the purpose of regulating and supervising the banking system to prevent bank failures. T/F, Explain.   The Board of Governors, Federal Reserve System.

5) Between the spring of 1990 and the spring of 1991, interest rates in the United States dropped nearly two full percentage points, but this did not have much of an effect on Investment expenditure 'plans'Explain how this could happen. Recall the importance of profit expectations, capacity utilization, etc...   DR. Ed Yardeni's 'Economic Network', "Interest Rates" chart.

6) According to the author of "Managing Credit-Money", a characteristic of commodity money was that it provided an automatic discipline on the economy. T/F, Explain.

7) In "A Human Reason Not to Raise Rates", Business Week states that "..at the July Fed meeting , hawks called again for a rate boost to cool off the steady ascent of real wages". What does the author mean by "human reason"? Explain   Leslie Earnest,"Household Debt Grows Precarious as Rates Increase", LA Times, 5-13-2000.

8) If a mutual fund investor noticed that her High Yield Bond Fund's net asset value (nav) is falling   "Vanguard High Yield Corporate", 5 year, Quicken chart.  it would be correct for her to conclude that higher future expected inflation is very likely to be the explanation. T/F, Explain. What 'other' factors could explain the falling value of the bond fund? Explain and illustrate using the Flow of Funds Model & the Securities Model.

9) The case of the Banking Crisis of the 1930's ( as pointed out in class discussion) illustrates the importance of understanding the role of the Money Multiplier and its 'determinants' when analyzing the behavior of the Money Supply. T/F, Explain.

10) Recall Robert Eisner's article "Address Other Issues and The Trade Deficit will Take Care Of Itself".
White House International Statistics 'Briefing Room'
Answer the following questions:

a) While it may have been appropriate in 1994 to be concerned about our Trade Deficit ($11 Billion in July,1994)- "the second- worst month in history", an assessment of the current trade balance numbers suggests that our trade picture is much better today. T/F, Explain.

b) Eisner suggests that Federal Reserve Policy can influence global interest rates ( i US / i RW ) and, therefore, the value of the dollar ( RW / $ ). Consider the case of the 'tight money' and a 'higher US rates'. Explain and illustrate graphically with the Foreign Exchange Market Model.

11) In the Robert Guttman's reading, "Managing Credit-Money", he states that "Assuming the Fed allows sufficient expansion of (excess reserves) in the banking system, the creation of private money is ultimately determined by the profit motive."   T/F, Explain.

12) What is the 'current' Unemployment Rate? White House Employment Statistics 'Briefing Room' What is the "Natural Rate" of Unemployment?What is the connection between the "Natural Rate" and the "Phillips Curve"? White House Inflation Statistics 'Briefing Room' What is the importance of the "Natural Rate" to the current ‘debate' over the appropriate Monetary PolicyExplain.  Recall the following readings: "Concept of a 'Natural Rate' of Unemployment Is Grossly Inflated" and "The Fed's Phantom Menace".

13) Why would the Federal Reserve consider a ‘tight money' and 'high interest rate' policy? Be specific, note the latest readings of the economy's performance indicators (unemployment, gdp growth rate, etc.. White House Financial Statistics 'Briefing Room' ). How would the Fed's "contractionary" policy affect the economy?   Explain. Illustrate: Money Market Model , Investment Demand Model, AD& AS Model

14) Think Money Market Model and draw a graph of a money demand curve and a money supply curve. On the graph, indicate the equilibrium interest rate. Also, indicate the 'new' equilibrium interest rate if the 'Fed' decreases the Supply of Money. Lastly, note the various 'factors' that can influence the Demand for Money. Briefly explain & Illustrate graphically .

15) According to Burton Malkiel-"Wall Street Moves Main Street"-, a large and sustained fall in the stock market would have 'significant' effect on Consumption expenditures but would have a 'negligible' effect on Investment expenditures. T/F, Explain "OAT", 5 year, Quicken chart.

16) Recall the videos "Raising Interest Rates" and "Making Sense of the Sanctum", consider the various views on "tight money" expressed in the programs. Do you see any signs of the"Keynesian / Monetarist" debate?   "FOMC At A Glance", The 'FOMC' Alert.   Consider class discussion, your text book, and note the essentials of this debate and its significance for the conduct of "monetary policy". Specifically, consider the debate in view of the following: targets, goals, lags, etc... White House Economic Statistics 'Briefing Room'
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