Exam - Pennsylvania State University



Name ___________ _________________ Last 4 (PSU ID) __________

Section: Please Check:

Section 001 - MWF: 9:05 - 9:55 AM : 114 Steidle Building __________

Section 002 - MWF: 11:15 AM - 12:05 PM : 104 Keller Building ____________

EXAM #2 - SPRING 2019

PLEASE PUT THE FIRST TWO LETTERS OF YOUR LAST NAME ON TOP RIGHT HAND CORNER OF THIS COVER SHEET – ONLY NON-PROGRAMMABLE CALCULATORS ALLOWED. THANKS AND GOOD LUCK!!!

Total Points for exam = 270

Test time = 120 minutes

Approximately one minute for every two points

To help with time management if spreading time evenly

Question #1 = 40 points.....18 minutes

Question #2 = 45 points .....20 minutes

Question #3 = 50 points.... 22 minutes

Question #4 = 40 points ....18 minutes

Question #5 = 50 points ....22 minutes

Question #6 = 45 points..... 20 minutes

Please answer all questions. You must show all work or points will be taken off.

1) ( 40 points total) We discussed shocks to the money multiplier during the Great Depression and also during the Great Recession. In both of your answers, make sure you write out the expression for the money multiplier along with the equation that determines the money supply and refer to it in your answer.

a) (10 points) What happened to the money multiplier during Great Depression and why? Was this a welcome development to the Fed and the economy? Why or why not? Explain.

b) (10 points) What happened to the money multiplier during Great Recession and why? Was this a welcome development to the Fed and the economy? Why or why not? Explain.

c) (20 points) Using the quantity theory of money, explain why, and under what conditions, money growth would serve as a good intermediate target. Please use the diagram we used in class to support your answer. This question is worth 20 points. Make sure you explain/define each term in the quantity theory, etc. You have this whole page to write your essay. Why did the Fed quit using Money growth as an intermediate target?

2. (45 points) Consider the graphic below.

a) (15 points) Using the diagram below, show (on the diagram) the period when the Fed did poorly on forward guidance using the expression for the 3 - year interest rate. What do we mean by doing poor with their forward guidance? Then show on the diagram and the expression for the 3 year interest rate, the period when the forward guidance worked and how do we know it worked - use the diagram in conjunction with your expression for the 3 year interest rate to explain.

[pic]

write your answer here:

b)(15 points) Using the diagram below, show the period of when the Fed did poorly on the forward guidance. Then show on the diagram the period when the forward guidance worked and how do we know it worked - use the diagram in conjunction the interpretation of the vertical axis on the diagram. What does the vertical axis on the diagram represent and what is the ideal value if the Fed is pursing maximum bite with their forward guidance? Please refer to your expression for the 3 year interest rate as we did in class.

[pic]

write your answer here:

c)(15 points) Now consider the current conditions in the US economy, monetary policy and forward guidance. What type of forward guidance is the Fed giving now and what would we expect the parameter that you discussed in part b) above to be now? Why doesn't the Fed give the same forward guidance now as they did when forward guidance had the 'maximum bite?' Explain. Use the word credibility in your answer.

3)(50 points total)

a) (10 points) When the Fed finally did decide to get off the zero bound they were worried about the repo market. What were they worried about and what did they do about it? Why was it so important to do what they did in the context of monetary policy and achieving the dual mandate?

b) (20 points) We drew the diagram below in class - please label the diagram and explain what exactly what story this diagram is 'telling.' In your essay, please include dates and numbers.

[pic]

write your essay here: (more room next page)

c)(20 points) We discussed the concept of quantitative easing (QE). Explain exactly how QE works, how does it stimulate the economy? Please provide a graph of the bond market to support your answer. This question is worth 20 points!

4) (40 points) Last spring (2018) was the ten year anniversary of the Bear Bailout when the Fed helped JP Morgan purchase Bear Stearns (March 14, 2008).

Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again

The Federal Reserve tried to limit the damage with extraordinary actions, first extending the firm credit before forcing it into a hasty weekend shotgun marriage to JPMorgan Chase & Co., with $29 billion in assistance.

a) (20 points - 10 points for correct T accounts and 10 points for explaining what is happening in each players T- accounts). So the Fed, roughly 10 years ago, lent JP Morgan $29 Billion. The Federal Funds Target at this time was 3% and the Fed was serious about maintaining this target throughout the bailout. Using the three T-accounts below - show exactly how the Fed maintained the 3% target even though they lent JP $29 Billion.

[pic]

Write your explanation here.

b)(20 points - 10 points for correct diagram - 10 points for explanation) Now depict this episode using a reserve market (demand and supply) diagram. The federal funds target was 3% and the amount of reserves in the economy was $44 billion. Show how the $29 billion loan to JP would effect your reserve market and then explain what the Fed had to do to maintain their 3% target.

[pic]

(10 points correct and completely labeled diagram)

write your explanation here

5) (50 points total)

a)(20 points) We discussed the evolution of the federal funds market in detail. The graphic below depicts the target and the actual funds rate during the fall of 1998. Use the graphic to produce your own graph of the federal funds market in the 'old days'. Please label points A, B, and C accordingly (the target is 5.25% for all 3 points) on the SAME graph. Explain exactly how the Fed used to target the federal funds rate and what went wrong at points B and C and what went right at point A? Refer to your graph with your explanation as to how the Fed used to operate. Finish your essay with what they, the Fed, should have done differently to avoid points B and C respectively (please be very specific)?

[pic]

[pic] room on next page for essay!

Write your essay here

Use the graphic below to answer part b)

[pic]

b) (10 points) We now move onto the new regime. On Saturday, June 25, 2016, the funds rate was safely in the range. Explain how the federal funds market worked back in 2016 - that is, who is using the federal funds market? How is the federal funds rate determined exactly?

As you can see in the graphic, the Fed has raised the range for the federal funds target numerous times since June of 2016. Let us consider the next hike - the range will go from .25% to .50% (as in graphic) to .50% to .75%.

c)(10 points) Pretend you are writing the statement and the implementation note (we looked at these in class). Your statement will start with: Today, the FOMC decided to raise the target range for the federal funds target from 25% to .50% to .50% to .75%. To do so we will ...................................

d)(10 points) What would happen in the federal funds market the next business day. Why would we expect the federal funds rate to jump immediately into the new range? Explain what is happening at the trading desk at the FRBNY. What would determine the specific level of where the federal funds rate will settle?

6) (45 points total)

a)(10 points) Prior to the second quarter of 2018, we see that the effective federal funds rate has periodic dips that are very short lived. The graphic below shows that one of those downward spikes occurred on Sept 30, 2015. Explain what is happening in the federal funds market that is causing these periodic dips. How long do they last?

[pic]

write your answer here:

b)(10 points) Now along with the downward spikes in the federal funds rate we also see spikes in use of the reverse repo facility. See the graphic below. Note, the identified spike is on the same day, Sept 30, 2015, of the downward spike in the federal funds rate. Explain what is happening and why the use of the reverse repo facility has increased on this day - where is the cash coming from! What does the Fed use as collateral for these reverse repos?

[pic]

Write your answer here:

c)(15 points) We are now ready to explain why the downward spikes for the federal funds rate 'disappear' during the spring of 2018 as well as why the upward spikes in the use of the reverse repo facility also 'disappear' at the same time. Use the country fair example that we did in class explaining what used to be happening in the federal funds market and reverse repo facility and then what is happening in these two markets now. Recall, we need to explain what caused the spikes (as you did above) to explain why the spikes 'disappear.' Why exactly did the spikes disappear?

[pic]

write your answer here

d)(10 points) Recently (last year), the Fed has been dealing with the federal funds rate bumping up against the upper bound which doesn't make the Fed look good. Why was it bumping up next to the upper bound and what did the Fed do about it ? Is it working? Explain. Use the present numbers if you can remember them!

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download