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Review Exam 3 Spring 2012 - Complete (got 93% on the test)

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ECON 2035

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ECON 2035Spring 2012Review Questions for Exam 3 chapters Central Banksthe Federal Reserve System the Money Supply Process and only part of Tools of Monetary Policyjust the Conventional Monetary Policy Tools sectionExam 3 WEDNESDAY APRIL 2530 Multiple choice questions1What is a central bankThe government authorities in charge of monetary policy Central banks actions affect interest rates the amount of credit and the money supply all which have direct impacts not only on financial markets but also on aggregate output and inflation2In 1900 there were about 18 central banks in the world but today there are about 160 central banks in the worldWhy are there more central banks today than in 1900 two reasonsFrom reading it seems to be from new countries that want to create an image of economic independence and also as a tool to speed monetary growth in these developing countries 3Is the statement The functions of central banks have remained unchanged over time true or falseThoroughly explain why you indicated the statement was true or falseIf you think the statement is true you should explain the timeless functions If you thing the statement is false you should explain the functions in the past and the functions nowI think recently the structure of the central banks have changed most notably in its function as a lender of last resort helping out a plethora of failing businesses and banks that it normally would not have been accountable for Another change in the function is the way they act The central banking system has moved away from certain methodologies and have moved to focusing on different newer methods of controlling the money supply In the end its function of keeping the economy on track and preventing high inflation has remained pretty much the same but the methods in which they achieve these goals are different over the evolution of time 4 Distinguish between microprudential and macroprudential regulation of the banking system characterizes the approach to financial regulationhe termmacroprudential regulation aimed to mitigate the risk of the financial system as a whole or systemic risk4Following Borio 2003 the macro and microprudential perspectives differ in terms of their objectives and understanding on the nature of risk Traditional microprudential regulation seeks to enhance the safety and soundness of individual financial institutions as opposed to the macroprudential view which focuses on welfare of the financial system as a whole Further risk is taken as exogenous under the microprudential perspective in the sense of assuming that any potential shock triggering a financial crisis has its origin beyond the behavior of the financial system The macroprudential approach on the other hand recognizes that risk factors may configure endogenously ie as a systemic phenomenon In line with this reasoning macroprudential policy addresses the interconectedness of individual financial institutions and markets as well as their common exposure to economic risk factors It also focuses on the procyclical behavior of the financial system in the effort to foster its stability5 The trend in the world is to more independence for central banksa Are central banks typically free to choose their own goalsExplain brieflyYes because they are not as tied down politically
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