MaxMarkCh13QuestionsOnly.docx

MaxMarkCh13QuestionsOnly.docx

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MaxMarkCh13QuestionsOnly

MaxMark—Viney

MenuItem13:

（Topic13）Anintroductiontointerestratedeterminationandforecasting

Question1:

Acountry’scentralbankwilladjustinterestratesifmajoreconomicvariablesareoutoflinewithlevelsorvaluesthatareconsideredappropriate.Whichofthefollowingisnotafactorthatislikelytoresultinanupwardadjustmentofinterestrates?

A:

therateofgrowthintheeconomyisexcessive

B:

thebalanceofpaymentsistoodeeplyindeficit

C:

creditisgrowingtoorapidly

D:

thedomesticcurrencyisunderupwardpressureintheFXmarkets

Feedback:

ThefactorslistedinA,BandCcouldleadacentralbanktoincreaseinterestrates.However,torelieveupwardpressureonthedomesticcurrency,itwouldbenecessarytoreduceinterestrates,soDisthecorrectanswer.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.522.

AnindicationofwhyacentralbankadjustsinterestratesfromtimetotimeisgiveninChapter12.Centralbanksareusuallyresponsibleforthedeterminationandimplementationofmonetarypolicy.Whilecurrentmonetarypolicyinanumberofcountriesisprincipallydirectedtowardscontaininginflationwithinatargetrange,thecentralbankwillhaveaviewonthedesiredlevelofeconomicactivity,employment,thebalanceofpaymentsandtheexchangerate.Itcanbeexpectedthatinterestrateswillbeadjustedfromtimetotimeifthesevariablesmovesignificantlyoutoflinewiththelevelsorvaluesthatthecentralbankconsidersappropriate.Whiletheprincipalconsiderationisthelevelofinflation,imbalancesineconomicvariableswillhaveanimpactoninflationandthereforearecloselymonitoredbythecentralbank.Forexample,acentralbankwillgenerallyincreaseinterestratesif:

∙therateofinflationoverthebusinesscycleisoutsideitstargetrange

∙

∙therateofgrowthingrossdomesticproductisexcessive

∙

∙thecurrentaccountofthebalanceofpaymentsissignificantlyindeficit

∙

∙creditgrowthandassociateddebtlevelsareexpandingtoorapidly

∙

∙thecurrencyisunderexcessivedownwardpressureintheFXmarkets.

∙

Ineachofthesecasesthecentralbankcanbeexpectedtotightenmonetarypolicy,thatis,increaseinterestrates,inordertocorrectanevolvingproblem.

Question2:

ConsiderthesituationinwhichtheReserveBankhasincreasedinterestratesthroughitsmarketoperationsinordertoreducethelevelofspendingintheeconomy.Astherateofgrowthineconomicactivityslows,thedemandforfundsalsoslows.Thisimpactofachangeininterestratesisdescribedasthe:

A:

inflationeffect

B:

liquidityeffect

C:

incomeeffect

D:

monetaryeffect

Feedback:

Thebuyingorsellingofgovernmentsecuritiesbythecentralbankwillchangethelevelofliquidityinthefinancialsystemandthiscancauseinterestratestochange.Inturn,aninitialchangeinratescanaffectthelevelofspendingintheeconomyandhaveflow-oneffectsrelatedtotheassociatedchangesinincomeanddemandforfunds.Thissecondaryeffectisknownastheincomeeffect,soCisthecorrectanswer.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,pp.522–523.

Chapter12discussedthemethodusedbyacentralbanktoimplementitsmonetarypolicy:

thebuyingandsellingofgovernmentsecuritiesinordertoaffectthemoneysupplyandthelevelofliquidityinthefinancialsystem.Thisisreferredtoastheliquidityeffectoninterestrates.Inaddition,therearetwoothereffectsthatneedtobeconsidered.Thesearereferredtoasthe‘incomeeffect’andthe‘inflationeffect’.

Theincomeeffectoninterestratesreferstotheflow-oneffectfromtheinitialliquidityimpactoninterestrates.Intheexampleabove,thecentralbankincreasedinterestratesinordertoreducethelevelsofspendingintheeconomy.Thiswasachievedbysellinggovernmentsecuritiesintothemarketandthusreducingliquidityinthesystem.Reducedlevelsofspendingresultinlowerincomesinallsectorsoftheeconomy:

thehouseholdsector,thebusinesssectorandthegovernmentsector.Thisoccursasemploymentgrowthfalls,thedemandforgoodsandserviceseases,andtaxationrevenuestogovernmentdecline.Also,astherateofgrowthineconomicactivityslows,thedemandforloansfalls.Theslowinginthedemandforloansresultsinaneasingininterestrates.Insofarastheeconomywaspreviouslyexperiencinginflationarypressuresduetohighlevelsofdemand,nowtheslowingofthepaceofeconomicactivitywillcausetherateofinflationtoease.Thiseasingallowsratesofinteresttoeaseaswell.Thisisreferredtoastheinflationeffectoninterestrates.

Question3:

Atighteningofmonetarypolicycanbeexpectedtohaveseveraleffects.Whichofthefollowingisnotoneoftheexpectedeffects?

A:

spendingwillslowininterestrate-sensitivesectorsoftheeconomy

B:

therateatwhichsuppliersofgoodsandservicesincreasetheirpricesshouldmoderate

C:

theflowofinvestmentfundsintothecountryshouldincrease

D:

demandforimportsshouldincrease

Feedback:

TighteningmonetarypolicymeansincreasedinterestratesandhigherratesshouldhavetheeffectsoutlinedinA,BandC,butdemandforimportsshoulddecreasesoDisthecorrectanswer.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.522.

Ifthecentralbankincreasesshort-termrates,andthesehigherratesaremaintainedforsometime,itislikelythatmedium-tolong-terminterestrateswillbeaffected.Theaimofatighteningofmonetarypolicyistoslowspendingintheinterest-sensitiveareasoftheeconomy.Asspendingslowsdown,thepositionofsuppliersofgoodsandservicesinthemarketplacewillweaken;asaresult,therateatwhichthesuppliersincreasetheirpricesshouldalsofall,andthereforetherateofinflationshoulddecline.Asspendingslowsandthereismoreofabalancebetweentheeconomy’sproductionandspendinglevels,thedemandforimportedgoodsandservicesfromoverseasshoulddecrease,bringingaboutanimprovementinthebalanceofpayments.Finally,byincreasingshort-terminterestrates,itislikelythattherewillbeanincreaseintheflowofinvestmentfundsintothecountry,andasaresulttherewillbeanincreaseinthedemandforthelocalcurrencyintheFXmarket.Thepriceofthecurrencywouldbebidupandwouldappreciate.

Question4:

Financialmarketeconomistsandcentralbanksconstantlyanalysemovementsinseveraleconomicindicators.Whichofthefollowingsets（A,B,CorD）containsthegreatestnumberofrecognisedkeyeconomicindicators?

I.capacityutilisation

II.jobvacancies

III.second-handmotorvehiclesales

IV.non-residentialbuildingapprovals

V.rainfallinagriculturalareas

VI.retailsales

A:

I,II,III,IV

B:

I,II,IV,VI

C:

II,III,IV,V

D:

III,IV,V,VI

Feedback:

Manyvariablesareusedaseconomicindicatorsincludingcapacityutilisation,jobvacancies,buildingapprovals,retailsalesandregistrationsofnewmotorvehicles.However,salesofsecond-handvehiclesandrainfallfiguresarenotusuallyregardedaseconomicindicators.SinceBcontainsallfouroftherecognisedindicators,itisthecorrectanswer.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,p.526;andFigure13.3.

Financialmarketeconomists,centralbanksandgovernmentsconstantlyanalysemovementsinnumerousindicators,asnosingleindicatorisconsistentinitsleadorlagtime,orconsistentlyintheonecategoryasaleading,coincidentorlaggingindicator.SomeofthekeyindicatorsthataremonitoredarelistedinFigure13.3.Theyhavenotbeenidentifiedasleading,coincidentorlaggingindicators,sincetheirmembershipofonegrouporanothercanchangeovertime.However,itmaybeaninterestingchallengetohavealookateachindicatorandconsiderwhichyouthinkmaycurrentlybeleadingindicators.

Figure13.3Indicatorsofeconomicactivity

Grossdomesticproductandgrossnationalincome

Balanceofpayments

Housingloanapprovals

Non-residentialbuildingapprovals

Privatesectorcreditgrowth

Unemploymentrate

Ratiooffull-timetopart-timeemployment

Jobvacancies

Wagesgrowth

Hoursofovertime

Imports

Capacityutilisation

Motorvehicleregistrations（passengervehicles,commercialvehicles）

Retailsales

Sharepriceindex

Telephoneserviceconnections（business）

Surveys（includingsurveysofconsumersentiment,businessinvestmentplans,andbusinesses’expectationsrelatingtosales,employmentandfutureprofits）

Althoughnotanexhaustivelistofindicatorsthataremonitoredbymarketparticipants,theitemsinFigure13.3aresufficienttosuggestthatknowingthestateoftheeconomyandwhereitmightbeheadedwithreasonableaccuracyisneithersimplenorstraightforward.

Question5:

Thesupplyofloanablefundsconsistsofthreemainsources.Whichofthefollowingisnotoneofthosethreesources?

A:

thesavingsofthehouseholdsector

B:

retainedearningsandothersavingsofthebusinesssector

C:

changesinthemoneysupply

D:

dishoarding

Feedback:

Whilesavingsofthehouseholdsectorareasourceofloanablefunds,retainedearningsaresubtractedfromtheinvestmentneedsofthebusinesssectortoarriveatanetdemandforfundsbythatsector,soBisthecorrectanswer.

MORE:

FinancialInstitutions,InstrumentsandMarkets5/e,pp.529–530.

Thesupplyofloanablefundsiscomposedofthreeprincipalsources.Thefirstandmajorsourceoffundsisthesavingsofthehouseholdsector,identifiedasSinFigure13.7.Thecurveisdrawnwithanupwardslopeonthebasisofthecommonpresumptionthatasinterestratesincrease,peop