3,168 Money, Banking and Financial Markets: Monetary Policy and International Finance Prof. Dr. Martin Brown

3,168
MONEY, BANKING AND FINANCIAL MARKETS: MONETARY POLICY

AND INTERNATIONAL FINANCE
Prof. Dr. Martin Brown
Mock Exam (Fall Term)
Time: 90 min
Permitted aids: Extended closed book: A scientific calculator and a dictionary are
allowed.
Total Points: 90 (the exact allocation of points may vary in the exam)
This mock exam displays parts of the official course exam in Fall 2015.
In red font, we indicate which share of the original question is shown in the Mock Exam.
Please do not take the exam apart or remove staples
Name: ________________________________________
Matriculation Number: ____________________________
Signature: ______________________________________
Good Luck!
Max Points Points in mock exam
Problem 1 18 6
Problem 2 20 6
Question 1 17 7
Question 2 15 6
Multiple Choice 20 5
90 30
1
Problem 1: Money Supply (18 Points)
6 out of 18 points
a) Use T-accounts to show how the assets and liabilities of the Central Bank, the banking sys-
tem and households are affected by the following transactions. How does the monetary base
change in each case? (2 points each)
1. The Central Bank provides a 3bn loan to a bank.

2. The Central Bank sells 1bn in securities to a bank.
b) At its most recent meeting (December 3rd 2015) the ECB Governing Council decided to de-
crease the interest rate on the deposit facility (interest rate paid on excess reserves) by 10
basis points from -0.2% to -0.3%. Discuss briefly how this action may affect bank lending, and
money supply in the Eurozone. (2 points)
2
Problem 2: Interest Rates and Exchange Rates (20 Points)
6 out of 20 points
2.2 Exchange Rates (10 points)
The table below provides hypothetical one year government bond rates for Switzerland and the US.
Maturity Period Rate One Year Bond Rate Switzerland One Year Bond Rate US
t=1
(maturing in 1 i11 1% 3%
year)
𝑈𝑆𝐷
a) The exchange rate today (t=0) is at 𝐸𝐶𝐻𝐹 = 0.8 (1 CHF buys 0.8 USD). Calculate the ex-
pected future exchange rate at the end of t=1 so that the (Uncovered) Interest Parity Condi-
tion holds. Is the CHF expected to appreciate or depreciate? (3 points)
b) One year bond rates are as presented in the table above. Suppose that the 1-year forward
premium on the USD to CHF exchange rate is 1%. Suppose a Swiss pension fund could in-
vest 1 Million CHF in Swiss or US bonds. What investment would you recommend that the
pension fund makes? Under which condition would the pension fund be indifferent between
the two investment opportunities? (3 points)
3
Question 1: Money Demand and Monetary Aggregates (17 Points)
Figure 1: M3 for Switzerland 2005 – 2015
7 out of 17 points
a) What are the two main motives for households and firms to hold money and how do they
relate to the concept of the monetary aggregates M1, M2 and M3? (3 points)
b) Comparing the money aggregates for 2005 to 2015 in Figure 1, there has been an apparent
increase in M3. Based on the graph, compare the increase in M3 to that of M1. Describe the
main developments in the composition of M3 which have affected M3 and M1 differently. (4
points)
4
Question 2: Monetary Policy Tools and Transmission (15 Points)
6 out of 15 points
a) What are the conventional tools of monetary policy? To what extent can conventional mon-
etary policy influence the interest rates that are relevant for firm and household investment?
(6 points)
5
Multiple Choice Questions (20 Points)
The following section contains 20 questions. Each question yields one point. Only one answer is cor-
rect in each question. Please mark the correct answer with a cross. Wrong answers will be pe-
nalized with one minus point. The minimum number of points achievable within this
block is 0 points. Skipped questions yield zero points.
5 examples (5 out of 20 points)

1. The loss of seigniorage is a disadvantage of a fixed exchange rate regime.
a. True
b. False
2. The policy trilemma states that a country cannot purse the following three policies at the
same time: capital controls, fixed exchange rate and sovereign monetary policy.
a. True
b. False
3. An unsterilized sale of foreign assets in the foreign exchange market leads to a decline in the
monetary base, a rise of the domestic interest rate and an appreciation of the domestic cur-
rency.
a. True
b. False
4. A central bank following a Tylor rule with equal weights for inflation gap and output gap
raises the target interest rates if inflation declines.
a. True
b. False
5. The interest rate charged by the central bank for discount loans sets a lower bound for the
interbank rate.
a. True
b. False

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3,168

MONEY, BANKING AND FINANCIAL MARKETS: MONETARY POLICY

Mock Exam (Fall Term)

Matriculation Number: ____________________________

Max Points Points in mock exam

1. The Central Bank provides a 3bn loan to a bank.

Figure 1: M3 for Switzerland 2005 – 2015

5 examples (5 out of 20 points)

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