UNIVERSITY COLLEGE LONDON
EXAMINATION FOR INTERNAL STUDENTS
Money and Banking
2 Hours 0 Minutes
©2011 University College London
ECON7003. MONEY AND BANKING. Exam, Summer 2012.
TIME ALLOWANCE: 2 HOURS
The exam is in two parts.
Part A accounts for 30 marks.
Part B accounts for 70 marks.
Answer BOTH questions in Part A.
Answer TWO questions from Part B.
In cases where a student answers more questions than requested by the examination rubric, the policy of the Economics Department is that the student's first set of answers up to the required number will be the ones that count (not the best answers). All remaining answers will be ignored. PART A.
Answer BOTH questions in this Part, which accounts for 30 marks.
Al. Use Phillips Curves and the Central Bank's indifference curves to illustrate diagrammatically the disinflation strategy of:
(a) a central bank which has an absolute aversion to inflation; (b) a strongly inflation-averse (`hawkish') central bank;
(c) a strongly unemployment-averse (`dovish') central bank.
Specify the advantages of the above framework over the simple ISLM framework with respect to:
(a) the central bank's preferences;
(b) the supply side of the economy;
(c) the representation of the medium run.
A2. We have a situation in which the non-bank public has a cash-to-deposits ratio of 25%, and banks have a required reserves ratio of 3%. Bank A has an excess reserves ratio of 0.03%.
(a) What is the money multiplier faced by Bank A under these circumstances? (b) Using numerical examples, discuss the likely effects on this multiplier of the following circumstances (assuming ceteris paribus in each case): (i) The bank expands its operations in the field of financial derivatives; (ii) There is a rise in the transaction costs incurred by banks in adjusting their balance sheets.
(iii) The non-bank public fears a banking crisis and a bank 'panic' occurs. 13 Marks
Answer TWO of the questions in this Part, which accounts for 70 marks. Each answer carries equal weight, i.e. 35 marks.
Bl. Outline some prominent features of the history of monetary theory in terms Quantity Theory of Money. In your answer, briefly outline Friedman's 'restatement' of the theory, and explain the role it plays in his critique of Keynesian demand management policy.
B2. Assess the extent to which the British government's monetary policy during the 1970s and 1980s was in accord with the doctrine of monetarism. What is `Goodhart's Law', and what was the place of this 'law' in debates about the respective merits of rules and discretion in monetary policy?
B3. Assess the record of the institutional reforms that have been made with respect to the role of the Bank of England in monetary policy since 1992. To what extent have these reforms been successful in establishing a satisfactory balance between targeting inflation and regulating output over the economic cycle? What features of the world economy have influenced the relationship between these two goals in this period?
B4 Explain.the.factors tending to encourage excessive risk-taking in the banking sector. In your answer, you may wish to make reference to the concepts of the equity multiplier and the convexity of pay-off to equity-holders, and to the rewards structure in the sector.
B5. Explain why the banking sector is subjected to a greater degree of regulation and government intervention than other sectors of the economy. Discuss some current debates in banking regulation, with particular reference to the concept of asymmetric information.
B6. How have changes in the nature of banking in recent decades been reflected in the size and nature of their balance sheets? In...
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