The financial sector: Practice Questions

• a.Offering low-interest mortgages directly to first-time homebuyers during a recession.
• b.Providing liquidity to a commercial bank that is solvent but facing a temporary shortage of cash.
• c.Regulating the capital adequacy ratios of investment banks to prevent systemic risk.
• d.Buying government bonds in the open market to reduce long-term interest rates.

• a.Increasing the reserve requirement for commercial banks to ensure they have more capital during a crisis.
• b.Directly printing physical currency and distributing it to households to increase the marginal propensity to consume.
• c.Purchasing assets to increase commercial bank reserves and lower yields on long-term bonds, encouraging lending and spending.
• d.Selling government bonds to commercial banks to reduce the money supply and control inflation.

• a.The growth rate will remain constant at 4% due to the fixed capital-output ratio.
• b.The growth rate will decrease because of the paradox of thrift.
• c.The growth rate will increase from 3% to 4%.
• d.The growth rate will increase from 4% to 5.33%.

• a.Managing the country's foreign exchange reserves to stabilize the currency.
• b.Setting the base interest rate to achieve a specific inflation target.
• c.Acting as the government's banker by managing tax receipts.
• d.Financial regulation and macro-prudential oversight.

• a.By offering large-scale infrastructure loans to national governments at market rates.
• b.By deregulating the domestic financial sector to attract foreign direct investment.
• c.By pegging the local currency to a stable reserve currency to reduce inflation.
• d.By providing small-scale financial services to individuals excluded from traditional banking, encouraging entrepreneurship.

Write your answer out first, then check it against the worked solution.