MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 5

Question 1

The 'shadow banking system' refers to:

Accepted Answer

Non-bank financial intermediaries that perform bank-like functions without deposit insurance or central bank access

Answer

Shadow banks—money market funds, repo markets, securitization vehicles—channel credit like traditional banks but lack prudential oversight and emergency liquidity backstops.

Question 2

A bank faces a duration mismatch when:

Accepted Answer

Its long-term assets are funded by short-term liabilities, creating interest rate and liquidity risk

Answer

Duration mismatch—borrowing short and lending long—exposes banks to rising interest rates (reducing asset values) and liquidity crises if short-term funding is withdrawn.

Question 3

Under a currency board arrangement, a country's monetary base is fully backed by foreign exchange reserves. What monetary policy tool does this eliminate?

Accepted Answer

Open market operations in domestic securities

Answer

A currency board must hold foreign reserves equal to the entire monetary base, so it cannot conduct domestic open market operations to adjust money supply independently.

Question 4

The 'money neutrality' proposition in classical economics asserts that:

Accepted Answer

Changes in the money supply affect only nominal variables, not real output or employment in the long run

Answer

Classical money neutrality holds that doubling the money supply doubles prices but leaves real quantities—output, employment, relative prices—unchanged in the long run.

Question 5

A repurchase agreement (repo) is best described as:

Accepted Answer

A short-term collateralized borrowing in which securities are sold with an agreement to repurchase them at a higher price

Answer

In a repo, a borrower sells securities (usually Treasuries) to a lender overnight or short-term and agrees to buy them back at a slightly higher price, effectively paying interest.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 5