Clearly label each answer. There are 120 points on the exam. Point allocations are indicated next to the question and correspond approximately to how much time you should allocate to the question.
1. The Federal Reserve (FED) uses open market operations to impact the monetary base and nonborrowed reserves. Describe the impact of an open-market sale on the Fed’s balance sheet and the impact on the nonborrowed reserves.
2. During the Great Depression, the ratio of excess reserves to deposits (er) increased as did the ratio of currency to deposits (c). Provide economic reasons why the ratios c,er increased and evaluate the impact on the money supply. How are the money multiplier and the monetary base aﬀected?
3 The US has capital mobility and ﬂexible exchange rates. The Federal Reserve is expected to increase nominal interest rates at a future date. Use the model of short-term nominal exchange rates to describe the impact of the anticipated rise in interest rates on the current nominal exchange rate. You must use a graph in your answer to receive full credit.
4. Suppose the domestic currency is depreciating and the central bank wishes to prevent any further depreciation of the nominal exchange rate.
(a) Describe the eﬀects of an unsterilized exchange rate intervention on the balance sheet of the central bank and the monetary base. (b) Describe the eﬀects of a sterilized exchange rate intervention on the balance sheet of a central bank and the monetary base.
5. A small open economy is in a recession. The government responds by increasing deﬁcit spending ( a decrease in government saving). Your must use graphs to receive full credit.
(a) Describe the short-run impact of the increasing deﬁcit spending on the real exchange rate, current account and capital ﬁnancial. (b) Assume purchasing power parity holds in the long run. Determine the real exchange rate in the long run. (c) (4 pts) Describe the short run eﬀect on the current account, speciﬁcally describe the J-curve for this example.
6. The game between ﬁnancial ﬁrms and the Federal Reserve is modeled in Figure 1.
(a) Describe the Nash equilibrium for the game in Figure 1. What is the ﬁrst-best outcome and is it a Nash equilibrium? (b) The Federal Reserve announces it will no longer bail out large ﬁnancial ﬁrms or banks when an institution faces insolvency. Suppose the economy is in a recession and several ﬁnancial institutions fail. Discuss whether the policy announcement is time consistent and credible. Explain how the Nash equilibrium is related to the concepts of time consistency and credibility