Review Questions – Final Exam
ECO 215 / Waters
Fall, 2011
The final is comprehensive and will consist of 5-15 True/False questions, 20 – 30 multiple choice questions and 2-4 essay questions. The essay questions will be drawn from previous quiz problems review questions for the midterms as well as the problems below. The exam covers chapters 1-17, except for 7 and 15 plus sections 23.1-23.3. The times of the finals are below.
Section 01 (11:00) at 10:00 a.m. on Tuesday, December 13
Section 01 (12:35) at 1:00 p.m. on Wednesday, December 14
1) Draw a graph of supply and demand for Reserves where the equilibrium federal funds rate is below the discount rate. The Fed makes an open market bond purchase of $100. Show the changes on the graph and the balance sheets for the Fed and the banks.
2) Use the following information for a Taylor rule. The equilibrium federal funds rate is 2%, the inflation target is 2% and the output growth target is 3%. Write the Taylor rule with weights of 0.5 on the output and inflation gaps. If actual inflation is 4% and actual output growth is 3%, find the federal funds rate recommended by the Taylor rule.
2) If the Fed observes a downward sloping yield curve, what should they do with the federal funds rate? Why? What affect will their action have on the yield curve?
3) Explain how the principal-agent problem applies to both banks and borrowers and also regulators and banks. What do some of the solutions to each situation have in common?
4) Toward the end of the Great Depression, the Fed raised the reserve requirement. Explain how this exacerbated the Depression while discussing the role of the banks in the national economy.
5) Name two reasons deflation could be harmful. Explain.
6) Explain why the equilibrium federal funds rate cannot rise above the discount rate. Draw a graph of the supply and demand for reserves where there is discount lending.