Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

17. Monetary policy has an immediate impact on operating targets like the federal funds rates
    and non-borrowed reserves. Over time, monetary policy influences the intermediate targets.
    Operating and intermediate targets differ by Fed control and time lags.


18. The Fed must accurately measure the targets and exert control over them. Furthermore, the
    target must respond to monetary policy predictably, and the target influences the Fed's goals.


19. The Fed's monetary policy coincides with the business cycle. Thus, monetary policy causes
    the economy to grow faster during a boom cycle, and slower during a recession. Monetary
    policy is supposed to do the opposite and smooth out the business cycles.


20. Economists suggest other targets, such as nominal GDP, yield curve, commodity prices, and
    U.S. dollar exchange rate.

Answers to Chapter 15 Questions.........................................................

1. Purpose of the balance-of-trade accounts is to account for money flows between one country
   and the rest of the world. Economists classify money flows into categories that allow them
   to analyze patterns in the cash flows.


2. Current account includes exports and imports, services and insurance for transportation, and
   gifts. Financial account keeps track of investment into real estate, stocks, and bonds. Finally,
   the official settlements account represents the intervention of the central bank.


3. Statistical discrepancy account occurs from errors, omissions, and unreported activities.
   Unreported activities include tax evasion, hiding money from government, or profits from
   illegal activities.


4. Three exchange rate regimes are the gold standard, the Bretton Woods System, and flexible
   exchange rates. Gold standard creates a fixed exchange rate system by setting a weight of
   gold to a currency's value. The Bretton Woods System was a gold standard that allowed
   countries to adjust their exchange rate relative to the U.S. dollar while the U.S. dollar
   became fixed at $35 = one ounce of gold. Finally, the flexible exchange rate regime allows
   supply and demand of currencies to determine exchange rates.


5. World Bank lends to developing countries, helping them invest in their infrastructure, such
   as new roads, dams, electric power plants, etc.


6. The IMF helps countries finance a balance-of-payments deficit. The IMF has a cache of gold
   and foreign currencies that it can lend.


7. Balance-of-payments deficit causes a surplus of currency on the international exchange
   markets. Thus, that country’s central bank must buy its currency using official asset