GIẢI ĐỀ BFT K64 THẦY TUẤN – ĐỀ EXAM 1

Question 1)

Question 2)
 a) The Fed funds rate should be set target:

= 7% + 1% + ½. (7% - 2%) + ½ . 2% = 11.5%

b) Expected inflation rate = (4+8)/2 = 6(%)
The Fed funds rate should be set target:
= 4% + 1% + ½. (4% - 2%) + ½ . 2% = 10%
c) Expected inflation rate = (0+14)/2 = 7(%)
The Fed funds rate should be set target the same part a, 11.5%

Question 3)

Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from
the Fed?

Banks may be willing to borrow funds from other banks at a higher rate than they can borrow from
the Fed for two reasons: First, the borrowing bank may find it easier with less requirements to
borrow from another bank, as long as they can make a profit via their lending. For instance, when
a bank borrows from the FED it often has to put forward collateral. Borrowing in an inter-bank
market may be accomplished on an unsecured basis thereby requiring a higher interest rate but
without a need for a pledge of collateral. Secondly, overnight lending between banks is faster,
and less expensive than overnight lending from the Fed.
Question 4) Compare the methods of controlling the money supply - open market
operations, loans to financial institutions, and changes in reserve requirements - on the
basis of the following criteria: flexibility, reversibility, effectiveness, and speed of
implementation
Open market operations used by the central bank to control the money supply in theeconomy
are more flexible, reversible. It can be altered as the situation changes and thus, fasterto
implement than the other two tools. The loans to various financial institutions, eventhough
not much flexible in nature, but are considered a more effective tool in controllingmoney supply
as compared to open market operations and reserve requirements. On the otherhand, the
changes in reserve requirements are also flexible as the central bank may change itif required,
and the commercial banks need to follow the same, but it also takes a bit to bit oftime to
implement, as well as it's not very reversible and flexible either.
 GIẢI ĐỀ BFT K64 THẦY TUẤN – ĐỀ EXAM 2

Question 1)

c.
Question 2)

Question 3)

Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from
the Fed?

Banks may be willing to borrow funds from other banks at a higher rate than they can borrow from
the Fed for two reasons: First, the borrowing bank may find it easier with less requirements to
borrow from another bank, as long as they can make a profit via their lending. For instance, when
a bank borrows from the FED it often has to put forward collateral. Borrowing in an inter-bank
market may be accomplished on an unsecured basis thereby requiring a higher interest rate but
without a need for a pledge of collateral. Secondly, overnight lending between banks is faster,
and less expensive than overnight lending from the Fed.
Question 4) The money multiplier declined significantly during the period 1930-1933 and
also during the recent financial crisis of 2008-2010. Yet the M1 money supply decreased
by 25% in the Depression period but increased by more than 20% during the recent
financial crisis. What explains the difference in outcomes?
The difference is that the monetary base increased dramatically during the recent financial crisis,
which was more than enough to offset the fall in the multiplier. During the Great Depression, the
monetary base rose modestly, if at all
How can the Fed use tools of monetary policy to achive this result?
The primary tools that the Fed uses are interest rate setting and open market operations (OMO).
The Fed can also change the mandated reserves requirements for commercial banks or rescue
failing banks as lender of last resort, among other less common tools. When the economy is
faltering, the Fed can use these tools to enact expansionary monetary policy. If that fails it can
use unconventional policy such as quantitative easing.