Second Money and Banking Take Home Exam

Course Number: 

Second Take Home Exam


1.     Spend no more than 3 hours working on the exam.

2.     You may use your text and class notes as resources.

3.     You may NOT collaborate with other students, or use resources not listed above.

4.     You may ask me questions about the exam, which I may or may not answer.

5.     You will write the following statement at the end of your exam and sign it: “On my honor, and with full knowledge of the University’s academic integrity policy, I attest that I have not violated the terms of this take home exam, and have not received nor given any unauthorized assistance.”

6.     You will turn in the exam at the beginning of class on Tuesday, November 12th.


Part I: Short Answer

Answer each of the following questions in 2-4 sentences. 5 points each, for a total of 25 points.

1.     Define the Monetary Base and explain why it’s important.

  1. Why does the Fed only rarely change the required reserve ratio?

3.     Distinguish between defensive open market operations and dynamic open market operation.

4.     Discuss the different levels of the Money Supply, especially M1 and M2, and tie the definitions to the idea of liquidity.

5.     How can the Fed prevent banks from using discount loans too often?


Part II: Longer Answer

Answer each of these questions in a paragraph (-ish). 8 points each, for a total of 64 points.

1.      Defend or criticize the following, in as much detail as possible: The Federal Reserve System is a decentralized central bank.

2.      Give examples of moral hazard and adverse selection, and discuss how regulation might be able to help.

3.      Connect the money creation process to our “money as stuff” and “money as idea” conversation.

4.       Derive the expression for the complex money multiplier. Define the components, and explain how a change in each will change the value of the multiplier.

  1. What levels of unemployment, economic growth and inflation are desirable as goals of monetary policy and why?

6.      Describe the advantages of open market operations over the other tools of monetary policy.

7.      Defend or criticize the following: in order to stabilize the economy, monetary policy needs fiscal policy, and fiscal policy needs monetary policy

8.      Explain the connections between the major goals of monetary policy and the secondary goals of monetary policy.


Part III: Essays

Answer each of these questions in three to five paragraphs. 15 points each for a total of 45 points.

1.     Explain, in detail, the process(es) of money creation. Carefully distinguish between the creation powers of the commercial banks and the creation powers of the Fed.

2.     The economy is a bathtub. The banking system is a bathtub. Explain the metaphors in as much detail as possible.

3.     Explain the rationale behind federal regulation of the financial system, including the issues of asymmetric information, adverse selection, and moral hazard.