M a c r o T h e o r y I I I : F i n a l E x a m Prof. Shiu-Sheng Chen (January 9, 2016)
Department of Economics National Taiwan University P r o b l e m 1: M u l t i p l e Choice Questions (75%)
1. Financial institutions, acting as financial intermediaries, perform all of the f o l - lowing, except:
A. provide ways to diversify risk.
B. pooling resources of small savers.
C. increase transactions-costs.
D. provide safekeeping and accounting services.
2. Economies of scale associated with financial intermediaries means:
A. the total cost of handling transactions falls as more transactions of different kinds are handled.
B. the cost per transaction falls as a larger volume of similar transactions are handled.
C. the cost per transaction increases as more transactions are handled.
D. the cost per transaction decreases regardless of the number of transactions.
3. If Bank A sells some its loans-to Bank B for cash, everything else equal:
A. Bank A's assets decrease and Bank B's assets increase.
B. Bank A becomes less liquid while Bank B becomes more liquid.
C. Banks A's total assets do not change, but Bank A is more liquid.
D. Bank A's liabilities decrease by the amount of the loans that are sold.
4. If a bank has customer deposits of $150 million, $15 million in reserves and the amount of excess reserves equals 0:
A. the required reserve rate is 15 percent.
B. the required reserve rate is 10 percent.
C. the required reserve rate is 1 percent.
D. the bank's net interest margin is 0.
5. The interest rate at which banks lend each other Eurodollars is known as:
A. the London Interbank Offered Rate.
B. the international federal funds rate.
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C. the discount rate.
D. the International Prime Rate.
6. Eurodollars are:
A. dollar-denominated deposits in banks outside the United States.
B. euro-denominated deposits in U.S. Banks, , C. the currency of the European Economic Union.
D. dollars that are specially printed for use abroad to minimize counterfeiting.
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M a c r o T h e o r y I I I : F i n a l E x a m Prof. Shiu-Sheng Chen (January 9, 2016)
Department of Economics National Taiwan University 7. Since the 1920's, the ratio of assets to capital has almost tripled for commercial
banks. Many economists believe this is the direct result of:
A. lower quality management in banks.
B. the increase in branch banking.
C. allowing banks to offer non-bank services.
D. government provided deposit insurance.
8. One reason a bank's officer may be reluctant to write off a past-due'loan is that it will:
A. increase the bank's liabilities.
B. decrease the bank's assets and capital.
C. increase the bank's liabilities and assets, requiring more capital to be held.
D. make the bank's accounts less transparent.
9. To say monetary policy is transparent implies:
A. that anyone could figure out what the correct policy should be.
B. monetary policy should not be so difficult that most people couldn't under- stand i t .
C. policymakers offer plausible explanations for their decisions along with sup- porting data.
D. that when faced with the same problem, policymakers will always react the same way.
10. The primary objective of most central banks in industrialized economies is:
A. high securities prices.
B. low unemployment.
C. a strong domestic currency.
D. price stability.
11. The federal funds rate is the interest rate:
A. the Fed charges banks who borrow from i t .
B. banks charge each other for overnight loans on excess reserves held at the Fed.
C. the U.S. Treasury charges banks that need emergency funds.
D. the FDIC charges banks that need to borrow from it to meet depositor de- mands.
12. Criteria used to judge a central bank's independence include each of the following, except:
A. budgetary independence.
B. long terms for members.
C. cabinet or ministry level of authority.
D. irreversible decisions.
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M a c r o T h e o r y I I I : F i n a l E x a m Department of Economics Prof. Shiu-Sheng Chen (January 9, 2016) National Taiwan University
13. Each of the following items would appear as assets on the central bank's balance sheet, except:
A. loans.
B. securities.
C. currency.
D. foreign exchange reserves.
14. I n dollar amounts:
A. the monetary base is larger than M2 and M l is less than M2.
B. M l is smaller than the monetary base and M2 is larger than both.
C. the monetary base is larger than M l and M2.
D. the monetary base is smaller than M l and M2 is larger than M l .
15. Which of the following best completes the statement? I f people increase their currency holdings, all else the same, the monetary base:
A. does not change but the quantity of M2 will decrease.
B. increases as does the quantity of M2.
C. decreases as does the quantity of M2.
D. does not change and neither does M2.
P r o b l e m 2 (15%) Given the present-value relation of stock price:
" °° / 1 V
1
°° ( 1V
^ = £* E ( ? — - ) D ^ = E ( T - - ) Etdt+j,
U = i v 7 J j=i v '
where dt denotes dividend. If dt follows a random walk process:
dt^ck-i+ut, ut~"-d- ( 0 , a2) 1. Show that
Pt = — dt r
2. Show that pt is also a random walk process.
3. I t can be shown that
Pt =\-)Et
r \r
^ U
+ r) ^dt+i+jwhich is an 1(0) process process since Adt ~ 1(0). What is the implication of the relationship between stock prices and dividends? How to test?
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M a c r o Theory I I I : F i n a l E x a m Prof. Shiu-Sheng Chen (January 9, 2016)
Department of Economics National Taiwan University Problem 3 (10%) The no-bubble condition is
k
lim Et
k—¥oo
1
1 + r Pt+k = 0 Assume that
Pt+i = (1 + 9)Vt
1. Find the condition such that the no-bubble condition holds.
2. Provide an explanation why a low interest rate may cause asset price bubble.
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