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Ec 367_review Questions

The document consists of review questions covering various financial concepts such as the differences between debit and credit cards, market types, and the theory of asset demand. It also explores the relationship between bond yields, the evolution of money, and the effects of monetary policy on GDP. Additionally, it discusses the implications of interest rate targeting versus money supply targeting in response to economic shocks.

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Ec 367_review Questions

The document consists of review questions covering various financial concepts such as the differences between debit and credit cards, market types, and the theory of asset demand. It also explores the relationship between bond yields, the evolution of money, and the effects of monetary policy on GDP. Additionally, it discusses the implications of interest rate targeting versus money supply targeting in response to economic shocks.

Uploaded by

tzg5ptxpyc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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REVIEW QUESTIONS

1. Clearly Differentiate the following terms:


 Debit card and credit card
 Primary and Secondary Markets
 Money and Capital Markets
 Adverse Selection and Moral Hazards
 Spot Foreign Exchange and Forward Foreign Exchange
 Bankers acceptances and Repurchase agreement
 Treasury bill and treasury notes.
 Hedging and arbitrage
2. The theory of asset demand provides a framework for deciding what factors cause the
demand curve for bonds to shift. Explain the Factors that shift the demand curve for
bonds.
3. Explain why yield curves usually tend to slope upward.
4. Discuss on the origin, history and evolution of money
5. What will be the relationship among coupon rate, current yield, and yield to maturity for
bonds selling at discounts from par? Illustrate using the 8% (semi-annual payment)
coupon bond, assuming it is selling at a yield to maturity of 10% and the bond’s face
value and price are TSH. 1000, TSH. 810.71 respectively.
6. Suppose you are given a perpetuity TSH. 1800, received from the British CONSOL you
hold. Assume that the interest rate is 8%. What is the present value of the perpetuity? Do
you think your perpetuity will be different next year? Explain
7. What is Fisher’s effect? What will happen to interest rates if prices in the bond market
become more volatile.
8. Explain the four possible effects of an increase in the money supply on interest rates.
9. Suppose that the one-year interest rate over the next five years is expected to be 5, 6, 7, 8,
and 9%, while investors’ preferences for holding short-term bonds means that the
liquidity premiums for one- to five-year bonds are 0, 0.25, 0.5, 0.75, and 1.0%,
respectively. Calculate the interest rate on the two-year and five-year bond.
10. Explain the three theories of the term structure of interest rates.
11. Assume that, in the short run, there are two types of shocks which may cause the level of
GDP to deviate from the long run, full employment level: (1) changes in autonomous
investment spending; and (2) changes in autonomous money demand.
a. Suppose that the Central bank sticks to money supply targeting: in response to any
investment spending or money demand shocks, the Central bank will leave the money
supply at the predetermined and targeted level. How will this money supply targeting
strategy affect the deviations of output from the full employment level under each of the
two types of shocks?
b. Now suppose that the Central bank targets the interest rate: In response to any shocks, it
adjusts the money supply to maintain the interest rate at its initial targeted level. How will
this interest rate targeting strategy affect the variations of output from the full
employment level under each of the two types of shocks?
c. If the only source of “shocks” in the economy is autonomous investment spending,
should the Central bank stick to money or interest rate targets to best stabilize GDP?
d. If the only source of “shocks” in the economy is fluctuating autonomous money demand,
should the Central bank stick to money or interest rate targets to best stabilize GDP?

Note: Explain how you reached your results for all the parts of this question (a. through d.). You
should feel free to use graphs or equations where appropriate. For all the parts of this question (a.
through d.), analysis should be conducted for the short run only.

Hint; use the IS-LM model

12. Discuss how true is Mark Twain’s statement that “the reports of cash’s death are highly
exaggerated”

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