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Question 1

All of the following EXCEPT one is a property of an illiquid market. Which one does not belong?

Agents cannot buy or sell large quantities easily

Dealers in illiquid markets are well capitalized

Attempts to buy or sell tend to move prices around a lot

Agents cannot buy or sell quickly

Question 2

Which of the following statements about the banking system of Bagehot's day is INCORRECT?

The division of the Bank of England into separate Banking and Issue departments served to keep notes scarce, and so acted as a mechanism of discipline

The central bank could supply an internal drain because it was at a higher level in the money-credit hierarchy than other banks

The Bank of England could lend freely to meet an external drain because of its massive gold reserves

A bank with too many discounts and too few notes could borrow from other banks using rediscount

Question 3

Which of the following BEST describes the Bagehot Principle?

In times of crisis, lend selectively at market rates, but only to those who you think will survive

Raise interest rates in booms, and lower them in recessions, to stabilize aggregate income

In times of crisis, lend freely at a low rate to prevent insolvent borrowers from failing

In times of crisis, lend freely against security that would be good in normal times

Question 4

Which of the following is NOT true about the discount mechanism in the "world that Bagehot knew"?

The market rate of interest depends on the marketwide balance between cash inflow from maturing bills and cash outflow from new discounts

The discounting bank raises its quoted discount rate to discourage demand for discount, and lowers to encourage

The discounting bank can avoid liquidity risk by creating deposits rather than lending its note reserve

Discounting banks change their quoted discount rates in order to balance their own cash inflow and outflow

Question 5

According to our model of dealer behavior, if the demand for a particular security exhausts the dealer's inventory, which of the following is the dealer's MOST likely response?

Stop quoting that security and lower the price on other securities to attract the demand

Lower the bid (buying) price

Raise the ask (selling) price, to discourage demand

Lower the ask (selling) price

Question 6

Which of the following MOST accurately characterizes the economics of the dealer function?

Dealers serve a social function by keeping prices at their fundamental value

A fall in the bid-ask spread encourages more dealers to enter the market

Value based traders establish the outside spread within which price fluctuates

Dealers make money by keeping prices constant even as demand fluctuates

In accordance with the Coursera Honor Code, I (KK Fong) certify that the answers here are my own work.

You cannot submit your work until you agree to the Honor Code. Thanks!

Economics of Money and Banking, Part One

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by Perry G Mehrling

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Economics of Money and Banking, Part One

Economics of Money and Banking, Part Oneby Perry G Mehrling

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Economics of Money and Banking, Part One
by Perry G Mehrling